Auto refinance: The hidden loan and member growth opportunity for credit unions

With the auto inventory shortage slowing both indirect and direct loan volume, auto refinance presents a great opportunity for lenders to put their excess liquidity to work and grow their auto loan portfolios while improving the member experience.

The Auto Inventory Shortage

For many credit unions, the global pandemic has resulted in unprecedented deposit growth coupled with a sharp decrease in loan volume and branch traffic. Thus, these credit unions are searching for new growth opportunities to put their excess liquidity to work in a profitable way.

Furthermore, the auto inventory shortage is slowing down both direct and indirect loan volume; in fact, new car inventory is the lowest it has been in over 30 years, leading to record high car prices. Looking to save money, borrowers are increasingly turning to auto refinance loans due to the high cost of auto loans in the current market.

With this decrease in both direct and indirect loan volume, auto refinance presents a great opportunity for credit unions to gain more auto loans while helping members save money and providing them with an improved digital experience.

Consumers are Overpaying for Auto Loans

Borrowers of all credit parameters are also vastly overpaying for their car loans as a consequence of inefficient credit models. For example, the average consumer is making a monthly car payment approaching $600, up 25 percent from a decade ago.

According to the published Consumer Reports analysis, pricing is also inconsistent – borrowers with very similar characteristics are constantly receiving different terms for their auto loans. Thousands of borrowers with good credit scores received loans with APRs more commonly associated with subprime consumers while borrowers with prime and super-prime credit scores received loans with APRs of 10 percent or greater.

Ultimately, borrowers are disadvantaged as a compounded result of inefficient credit models and lack of auto inventory, often resulting in them choosing loans based on monthly payment vs. lowest APR.

Lack of Verification Leads to Higher Defaults

Problematically, lenders rarely verify income and employment of borrowers in order to confirm they have sufficient income to repay their auto loans. This lack of verification leads to higher default rates and a higher portion of income being spent on car loans.

Currently, 25 percent of consumers spend over 10 percent of their income on car debt, and 96 percent of borrowers did not have their income verified when getting an auto loan. In 2020, misrepresentation of income and employment led to $4.4 billion in auto loan losses.

The Opportunity for an Improved Digital Experience 

Finally, the current state of the auto industry leaves much to be desired by borrowers. With more consumers expecting a digitally-enabled experience, they are less and less likely to step foot in a branch to refinance their auto loan. As proof, 71 percent of car shoppers want to do more of the purchase steps online.

As a result, lenders have a strong opportunity to provide a differentiated, digital experience that can service their members’ preferences while delivering lower rates.

Put Excess Deposits to Work and Better Serve Members with Auto Refi

All of these compounding factors – the need to put excess deposits to work, the overall decrease in indirect and direct loan volume, and the need to provide more affordable and digital customer experiences – demonstrate the strong opportunity for credit unions in auto refinancing. Lenders have the opportunity to help consumers save on average 16 percent on their loan payments while simultaneously growing their auto loan portfolios.*

Credit unions can gain more auto loans and members through more compelling offers by partnering with Upstart, a leading AI platform partnering with credit unions to expand access to affordable credit. Seeing huge growth in auto refinance loan origination volumes, Upstart can help credit unions exceed their loan volume goals with a turnkey, all-digital solution. This partnership enables credit unions to capitalize on these market conditions and grow their auto portfolios. In fact, loan volume was cited as financial institutions’ most important fintech partnership objective according to the Financial Brand.

Based on Upstart’s data, it found that AI and digitization have the potential to find hidden prime borrowers and double borrower application “pull-through” rates. Ultimately, with an AI-enabled fintech partnership, credit unions can grow their auto loan portfolios, deliver a modern, digital refinance experience and lend to more creditworthy borrowers without taking on more risk.

*This information is estimated based on all consumers who were approved for an auto loan through Upstart and accepted their final terms. As of 12/31/2021, the average monthly savings amount is 16%.