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Opinion

As auto lending slows, leasing grows

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The advent of ride-hailing apps and on-demand transportation has revealed a rapidly changing automotive industry, where preferences are fickle and vehicle ownership is optional. Despite this, automotive sales are projected to stay strong in 2020, with many experts calling for another good year.
Edmunds analysts, for example, recently forecast that 17.1 million new vehicles would be sold this year – the same as last year. They cite low unemployment and high consumer confidence, along with stable finance rates and other factors.

The last time the automotive market sold fewer than 17 million new cars? 2014.

This is, of course, great news for credit unions. More car buyers mean more consumers needing auto loans. According to the National Credit Union Administration (NCUA) 2019 Q3 Report, total loans outstanding were $1.1 trillion, which includes total auto loans of $374 billion. Considering auto loans represent one-third of credit unions’ total outstanding loans, the new vehicle sales forecasts are a big deal. That loan activity results from what credit unions are known for: a fair rate, great customer service and the ongoing contribution to communities big and small.

Warning signs

It’s not all sunshine and roses, though. Behind the forecast numbers lies another indicator with a clear message: new car prices continue to climb. Edmunds analysts also noted the average transaction price for a new vehicle in 2019 was up to a record of $37,183. They expect prices to continue rising.

Back in 2014? The average new vehicle price tag was $32,386.

Indeed, the steady drumbeat of new car price increases has had some unintended consequences. First, it’s clear that the high prices of new vehicles drive interest in leasing. That’s especially the case when you consider the emergence of today’s “usage-based economy,” and how many people aren't as concerned about actual vehicle ownership.

This might be difficult news for credit unions that focus on auto loans. The convergence of a consistently strong sales market and higher new vehicle prices has perpetuated – some might say created – the long-term loan. Today, 72- and 84-month terms are common. That’s a very long time to be locked into an auto loan. In that time a new decade will be knocking at the door.

For credit unions, it’s an unfavorable scenario: Car buyers looking for low payments max out their loan term to, say, 72 months. However, a loan may only stay on the books for a fraction of that time, as borrowers are often advised to refinance as quickly as possible. If the borrower refinances at another institution, the credit union must replace that loan with another round of origination costs or risk losing out on months or even years of interest.

Leasing can help solve this. Most leases stay on the books near full term, which is to say that owners most often complete their lease payments according to schedule before moving on to the next vehicle. An explanation is that the average lease term is 40 months and offers low payments, making them less of a target for companies looking to refinance your member’s loan. Therefore, leases can be more profitable because credit unions are receiving the interest payments for nearly the full term – and that translates into more yield for the credit union. Add that to a consistently lower credit default ratio and lower participation fees for the dealer, and the value of leasing becomes obvious. This is one way that credit unions can build a more stable bedrock of consistent business.

In fact, credit unions are increasingly adding leasing in order to grow and diversify their loan portfolios.

What a difference five years makes

Since 2014, leasing receivables among credit unions have more than quadrupled, according to data from Callahan and Associates, increasing from $853 million in September 2014 to $4.7 billion as of Q4 2019. Not only that, but leasing’s share of all credit union auto finance balances (leases, new auto loans and used auto loans) has jumped from 5.9% in 2014 to 15.6% in 2019. So the balances are growing and it’s becoming an increasingly large portion of credit unions’ loan portfolios.

Even with all the benefits, vehicle leasing might not be ideal for all credit unions. But with car buyers still buying and prices still rising, it is a solution that could bring additional value to members, diversify an institution’s product portfolio and add more profit for certain types of vehicle transactions. As we head into this new decade with new ideas about vehicle ownership and financing, it makes sense to offer customers greater choice for greater value – all of which can lead to greater prosperity for your credit union.

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