By Crystal Bullard
All signs for 2018 point to a slight deceleration in auto sales and, in turn, auto lending. Given the continued growth of the U.S. stock market and low unemployment rate, the Federal Reserve is expected to increase interest rates three times over the next year. While rate increases aren’t expected to be astronomical, they’ll likely be enough to impact borrowers’ vehicle purchase behavior, slowing momentum from the record-breaking auto sales experienced over the past four years.
Monthly payments increase with higher auto loan rates, pushing buyers to consider driving their existing vehicles longer than they originally intended. Longer-lasting, more dependable vehicles have made driving an older car much easier and more popular in recent years. In fact, the average American keeps their car 11.5 years, two years longer than they did just 10 years ago.
When interest rates—and therefore monthly payments—rise, drivers who must replace their vehicle are more likely to consider buying a used car. Quality used cars are easier than ever to find since the popularity of leasing has led to large numbers of low-mileage, late-model vehicles returning to dealerships.
Obstacles in the Road to Auto Lending
When economic conditions create obstacles to growing auto financing portfolios, lenders must think strategically about how to protect both interest and non-interest income revenue streams.
Since a majority of used vehicles have aged out of their manufacturer’s warranty or exceeded mileage limits, vehicle protection products can help alleviate the worry associated with a used car purchase. Unfortunately, the cost of a used vehicle extended warranty, particularly when purchased through a dealership, can make price-conscious buyers reluctant to buy.
With decreased loan balances, there may be less need for a traditional Guaranteed Asset Protection (GAP) product, as loan amounts will stay more closely aligned with vehicle values over time.
New Roads to Fee Income
Vehicle protection products are finally keeping pace with changes in consumer purchasing behavior and vehicles themselves. The new evolution in GAP is GAP with PowerBuy, which includes benefits to help with vehicle depreciation costs.
Taking into account both the vehicle’s loan “gap” and depreciation, GAP with PowerBuy can provide your borrowers with tremendous value, while giving your credit union the opportunity to generate fee income with each auto loan. Further, because the borrower is required to finance their next vehicle with your credit union in order to use the PowerBuy depreciation benefit, you’re guaranteed return business.
While 2018 may not break records for auto lending, there are still opportunities to grow business and provide value to your borrower. By overcoming obstacles in the road to sales and offering valuable vehicle protection products, your credit union will be on its way to a successful and profitable year.
To learn more about auto lending trends and ways to improve the success of your auto lending program, visit swb.us/auto-lending to download our free ebook, 2018 State of Auto Lending.
Crystal Bullard is Manager, Business Development, Financial Institution Group, with SWBC.