A shift back to used vehicles creates opportunity for credit unions

At the onset of COVID-19, the automotive industry experienced an unprecedented situation with stalled sales resulting from factory shutdowns, business restrictions and buyers choosing to delay purchases. To adjust, manufacturers offered competitive incentives to increase sales. Low interest rates, no money down offers, and extended loan terms made new vehicles an enticing buy, driving prime consumers back into the new vehicle market. As a result of the incentives, we saw captives increase overall market share, while credit unions and other lenders took a hit. 

Captives have historically held the largest portion of the new vehicle financing, but with the incentives offered early on during COVID-19, their market share jumped even higher. According to Experian’s Q2 2020 State of the Automotive Finance Market report, captives held more than 60% of new vehicle financing, up from 54.8% in Q2 2019. Comparatively, credit unions comprised 10.2% of new vehicle financing, down from 11.8% in the same time frame.

Additional opportunity still exists for credit unions. Months into the pandemic, there are fewer incentives, new vehicle inventory shortages and rising vehicle costs could trigger car shoppers to lean back into the used vehicle market; a sweet spot for credit unions. 

Used vehicles rebound faster than new

Overall, used vehicles are still in greater demand than new ones. Used vehicles made up 59.25%, of all financed vehicles in Q2 2020. And with new vehicle inventory shortages, used vehicle sales have rebounded at a faster rate than new. In June 2020, new vehicle sales were still down 10.73% year-over-year, while used vehicle sales actually grew 12.14% over the same period. This trend has continued through the summer, with 2.38% growth in July and 4% growth in August. 

This opens a great window of opportunity for credit unions. In the current environment, many consumers will expand their search for affordable financing options outside of what’s offered at the dealership. Historically, credit unions have held a strong percentage of the used vehicle lending market. In fact, in Q2 2020, credit unions held 24.9% of the used market share, second only to banks who held 34.8%. Credit unions can grow their market share offering loans at affordable rates that appeal to in-market car buyers.

Prime consumers make up the largest segment of used vehicle loans at 36.9%. This is a positive trend for credit unions. Staying close to the data can help credit unions understand trends and anticipate demand, such as used vehicle demand rebounding—especially for prime consumers.  

Extended terms keep payments manageable 

The average used vehicle loan amount continued to grow in Q2 2020, reaching just over $36,000. But to manage this increase, car buyers increasingly opted for extended loan terms to keep their monthly payments manageable. Terms reached record highs for used vehicle loans, with an average term length of about 65 months. Seventy-three-to-84-month term loans also saw an increase from 18.7% in Q2 2019 to 20.6% in 2020. This helped keep the average monthly payment for a used vehicle loan at $568, which was only an $18 increase from Q2 2019. 

Another contributing factor to manageable monthly payments was interest rates, which saw a steady decline, clocking in with an average rate of 9.69% for used vehicles in Q2 2020. As incentives continue to decrease, car buyers will look for the best rate for their loan, making way for credit unions to offer incentives that will attract more in-market consumers.  

The automotive industry has experienced significant change since the beginning of COVID-19. While the initial reaction of manufacturers was to offer competitive, sales-driving incentives to push new car sales, they’ve scaled back their efforts, resulting in many consumers returning to the used market. As we continue to navigate toward recovery, credit unions can leverage this shift by staying close to the data, identifying trends and remaining fluid with strategies that offer consumers the best financing options, no matter their needs and budget.

Melinda Zabritski

Melinda Zabritski

Melinda Zabritski is Senior Director for Experian automotive financial solutions team, where she is responsible for implementing products and services specific to the automotive credit and lending industry. She also ... Details