USAA ‘cherry-picking’ assets as auto finance competition heats up 

USAA is strategically financing certain vehicle types as banks and independent auto finance companies face a challenging market driven by captives offering more incentives and lower rates.  

The first half of 2024 will likely prove tough for banks competing with captives, Mark Pregmon, vice president of consumer lending at USAA, told Auto Finance News. USAA provides insurance, auto financing and banking products for military members and their families. 

“Banks are looking at certain makes and models and brands that [captives] aren’t subventing,” he said. “It’s cherry-picking where you can [lend] and where you aren’t going to compete with the captives. … We’re maintaining our market share, but it’s a much smaller pie.”  

“We’re maintaining our market share, but it’s a much smaller pie.” — Mark Pregmon, USAA

Luxury cars and used vehicles, for example, pose opportunities for USAA and banks, Pregmon said.  

“I’ve been in this business for 30-plus years,” he said. “It’s just the cycle. You pull out your playbook, and that’s what you do. That’s where [USAA is] at right now, competing in the used [market], and most banks are there as well.” 

All about rates 

The industry is becoming more of a buyer’s market rather than a seller’s market, defined by better conditions for consumers looking to purchase a car as automakers offer incentives and supply increases, Pregmon said.  

“When you have slowing inventory and slowing sales, you start to see captive subvention, 0% [annual percentage rate] and 1.9% [APR] picking up,” he said, noting that USAA “can’t compete with 0% to 1.9% because our cost of funds is higher than that.”  

USAA’s rates for a 36-month term loan start at 5.89% APR for new cars, 5.99% for used cars and 9.24% for loans on model-year 2016 vehicles or older, according to the lender’s website. USAA reviews rates daily and makes changes weekly, Pregmon said. 

Even with subvented financing, car prices and interest rates are elevated and affordability remains a concern for consumers, Pregmon said, noting that USAA is more competitive from a direct lending standpoint. 

“I can compete when [members] come to me directly as my prices are competitive,” he said. “There’s no dealer participation on our rate and we don’t charge a loan fee.” 

Origination growth 

USAA saw about 15% year-over-year growth in total auto loan production for new and used vehicles in 2023, Pregmon said, without providing specifics. USAA had $18.4 billion in auto outstandings as of June 30, 2023, up 16.4% YoY, according to a Moody’s presale report of the financier’s only auto asset-backed securitization transaction in 2023. 

“This year, [loan growth] is off to a slow start,” Pregmon said. “All bank financing is down year over year and we’re following the same trend.” 

Cash sales across the industry have slowed as rates come down and incentives become more available, he said. USAA also sees a high volume of refinancing in auto. 

“We think [origination volume] will be flat year over year for most banks and us because of the market dynamics,” Pregmon said. “We’ll see some growth in the second half of the year; most lenders will see [growth] as subvention will start to come down, rates will come down and some of the buyers that are on the sidelines will come in to buy.” 

Credit performance steady, terms lengthen 

While USAA did not provide specific delinquency data, Pregmon noted that past-due loan and loss rates are “trending better than pre-COVID.” 

USAA auto loans 30-days past due sat at 0.39% as of June 30, down from 0.46% a year prior and 0.54% as of Dec. 31, 2019, according to the presale. 

USAA’s portfolio is largely shielded from wider macroeconomic pressures and unexpected fluctuations in unemployment because about 70% of its borrowing base receives a paycheck from the government, Pregmon said. By comparison, most banks’ consumer base includes only about 10% to 12% of borrowers who are employed in government jobs, he said. 

Borrowers are “either retired, have a government paycheck coming in, are active duty or on reserve,” Pregmon said. “That makes a difference in our performance.” 

USAA’s average loan term sat at 67 months in 2023, up 2% YoY, while the average loan size fell to $44,000 in December compared to a peak of $47,000 in April 2023, according to USAA data provided to AFN. Even with longer terms, loans typically sit on the books for 27 to 30 months, Pregmon said.  

Meanwhile, USAA is integrating a new loan origination system (LOS) to streamline mobile application and funding processes, he said. Auto lending is in a pilot phase on the new LOS, which the financier has been working for the past 18 months to build in-house, he said. 

“Loan origination is your chance to shine; you want to make sure you have a great experience,” Pregmon said. “Once we deliver, it’s going to be continual improvement.” 

Early-bird registration is now available for the second annual Auto Finance Summit East, May 1-3 in Nashville, Tenn., which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross section of industry players. Early-bird pricing ends March 15. Visit  AutoFinance.Live to learn more.