Rate and term: How credit unions are winning market share

In the latest chapter of the market ebbs and flows spurred by COVID-19 shutdowns that began over two years ago, credit unions (CU) are now offering longer loan terms and more attractive rates to drive originations, and they’re claiming a larger share of auto loans in the process, on the heels of the steepest rise in benchmark interest rates since the 1980s and soaring vehicle prices.

Payment-conscious consumers are responding as new-vehicle manufacturer suggested retail price (MSRP) increase and used-vehicle values remain elevated, Thomas King, chief product officer and president of JD Power’s data and analytics division, said last week at the Origence Lending Tech Live conference in Aurora, Colo. “Very competitive rates [are] driving success” at credit unions, he said.

Simply put, CUs are taking a much larger slice of the proverbial pie, though that pie has gotten smaller in a limited-inventory environment, Brian Hamilton, president of Origence Lending Services, told Auto Finance News.

“Why have credit unions continued to not just do ok, but thrive in this market where fewer cars are being made?” Hamilton said. “It really ties to the fact that, although the pie is much smaller, we’re taking a much bigger slice — we’re taking from the captives and the traditional financial institutions.

“That really has to do with the 84-month terms and the great rates we have,” Hamilton said. “Affordability continues to be a challenge, especially when [car] prices are higher.”

In fact, credit unions in Q2 were offering an average interest rate of 3.2% on new-vehicle loans with terms of 72 months to borrowers with a FICO of 740-plus, according to JD Power data. That’s 130 basis points (bps) lower than the average interest charged by banks, and 70 bps lower than the rate charged by captives.

By comparison, credit union rates in Q2 2019 clocked in at 4.1%, 1 bps higher than the captives’ offering and 6 bps lower than banks’ average rate, according to JD Power.

Longer terms fuel sales

CUs are also offering longer term loans to help offset the rising cost of vehicles in both the new and used markets, another driver of increased market share, King said. Longer-term loans have long been a key lever that lenders have pulled to combat affordability concerns.

CU share of new-vehicle loans with terms 84 months and longer clocked in at 49% in the second quarter, up from 37% in Q2 2019, according to JD Power.

“They’re catching almost half of all 84-month loans on new vehicles,” King said, noting that captives haven’t been aggressive in the space since the summer of 2020, when 84-month, 0% APR incentives were rampant to help fuel vehicle sales after initial COVID shutdowns.

“They want to keep folks coming back” and buying vehicles, King said.

CUs command a majority share of long-term loans in the used market, too, according to JD Power data. In fact, CUs held 65% share of 84-month loans for used vehicles at franchised dealerships in Q2, up from 58% in Q2 2019.

To be sure, only 6% of loans in Ford Credit’s $76.8 billion consumer portfolio had terms 84-months or longer, according to the captive’s earnings supplement.

By the numbers

The 1,146 CUs that use Origence’s origination platform funded a record of 1.3 million loans through the first six months of the year, a 23% year-over-year increase accounting for $39.5 billion in auto originations, Tony Boutelle, president and chief executive of lending solutions provider CU Direct, now Origence, said last week during the Origence Lending Tech Live ’22 conference in Aurora, Colo.

Over three-quarters of that volume was made up of auto loans, Boutelle said. This accounts for $29.6 billion in auto loan production, according to an AFN analysis. A large majority of those —76% — were for used vehicles.

“To give you some indication of how big that number is, [in 2021] for the whole year, we did $57 billion,” Boutelle said, whereas  Origence originated $44 billion in loans and leases through its platform in 2020, a 29.5% increase.

“This says that we’re on track for $78 million,” Boutelle said.

In aggregate, CUs on Origence’s platform were the largest auto lenders by volume through May, according to AutoCount data, originating 610,815 loans and leases nationwide, a 20.8% YoY increase.

Looking closer, a similar story is playing out across states with the largest auto finance volume. In California, the largest state for auto financing, SchoolsFirst Federal Credit Union was the No. 10 largest auto lender with 5,413 loan and lease contracts financed, a 26.6% sequential increase and up 60.2% YoY.

In Florida — the second-largest state for auto financing — Suncoast FCU landed at the No. 5 spot, producing 4,927 auto loans and leases, a 21.4% YoY gain, and Space Coast FCU increased its auto production 123.4% YoY to 4,927 contracts, landing the Melbourne, Fla.-based CU as the No. 8 largest auto lender in the state.

Banks pull back, again

After reclaiming market share a year ago, banks have started to pull back again on auto lending on a sequential basis as yields tighten and the Federal Reserve’s benchmark interest rate range now sits at  2.25% to 2.5%, representing a combined 150-basis point jump in June and July. Chase Auto, for one, saw a 3.8% quarter-over-quarter decrease in its auto portfolio, PNC Financial’s auto book dropped 4.4% sequentially, and Citizens logged a 4% sequential decline.

Still, it remains to be seen if CUs will be able to carry the same momentum through the remaining six months of the year, Origence’s Boutelle said.

“The next six months are going to be a little iffy as far as rates go and how the market plays out,” Boutelle said. “I think there’s still going to be a big demand for cars, so we’re going to [originate loans], but maybe not quite as many as in the first six months.”

Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com.