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Why credit union auto lenders need to be wary of longer terms

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Auto financing continues to be a strong growth area for credit unions, but one analyst warned there are a few areas that should cause concern for CU lenders.

Melinda Zabritski, senior director for financial solutions for Experian, has been a fixture at CU Direct’s DRIVE conference over the years, frequently sharing the credit bureau’s statistics and insights. Speaking during the 2018 conference near Dallas, she noted that car loan terms have been creeping longer and longer in an effort to keep monthly payments at an affordable level, and hinted they might be getting too long in the tooth.

In 1984-85, the term of new car loans went from 46 months to 52 months, and lenders were “freaking out,” she recalled. In examining the data from 2017, terms of 72 months and longer are common.

“Longer terms are not new, but they are becoming the norm,” she said.

In the United States in 2016, median income per capita was $31,099 – which also is the average amount needed to buy a new car. Zabritski said the average loan amount continues to grow, up to $33,272 for the average CU new car loan in Q1 2018. Similarly, in the used car markets there have been record highs in loan amounts for nine straight years.

“At some point, this will impact affordability,” she pointed out. “One way to accommodate affordability is to extend the loan term. Few long-term loans are originated in the highest risk tiers. In 2017, only 4 percent of all auto loans were 25 months to 36 months, while 23.8 percent were 73 months to 84 months.”

After years of declining interest rates, they are going up. The average rate for new vehicle loans at CUs in Q1 2017 was 3.64 percent in Q1 2017, jumping to 4.06 percent in Q1 2018.

“Rates are going to keep on ticking up,” she predicted.

Average monthly payments have gone up every year since 2012. According to Experian’s numbers, the gap between new and used monthly payments has increased. Zabritski said this has caused some consumers to shift how they purchase, from buying to leasing. Leases made up 23 percent of contracts 10 years ago, zooming up to 35 percent today.

“Credit unions are poised for growth with a focus on used lending and prime segments,” Zabritski assessed. “Credit union market share has increased five straight years, and in Q1 2018 has reached 21.3 percent. They are taking share from banks and finance companies,” she added.

Delinquency increases are tapering off for all lenders. CUs have the lowest delinquency rate of any lender type at 0.24 percent, she said.

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