Car sales may spike, but are members ready for vehicle ownership?

Rebates, discounts, and special financing for qualified buyers are some of the ways auto dealers are getting consumers to browse showroom floors this year. With the average age of vehicles currently on the road topping 12 years, your members might just be ready to sign on the dotted line. But is now the right time to buy?

Despite inflation cooling, members are still under financial pressure and facing steep prices that force uncomfortable decisions about how to spend money. The reality is the cost of essentials is still not coming down as quickly as we would like and there’s no clear sign when—or if—it will. For more than a year, members have been adjusting to these high prices by relying heavily on credit cards and savings for everyday purchases, creating shorter money lifecycles within the household—and greater opportunity to default on essential payments.

In this context, we’ll take a closer look at potential potholes on the road to new vehicle ownership and see how credit unions can protect their auto portfolios—and their members—from financial distress.

Roadblocks exist for car buyers

Financing incentives can be enticing to members who may not be looking at the bigger picture of owning a new vehicle. Zero down is great for some, but won’t do you many favors monthly when the average cost of a new vehicle hovers around $48,000 and interest rates are averaging 6.58%.

Monthly vehicle payment aside, maintaining and repairing a vehicle has seen dramatic increases as well. The most recent Consumer Price Index from the Bureau of Labor Statistics points to a 20% increase in vehicle repairs. According to AAA, “Common repair costs average $500 to $600 and in many cases go much higher.” In short, members could be a set of new tires or a new timing belt away from a financial predicament.

If all that wasn’t enough, there’s sticker shock at the pump, too, as gas prices across the country average $3.85 a gallon. And let’s not forget vehicle insurance. According to MarketWatch, the average cost of a full-coverage car insurance policy in the U.S. is $2,008 per year ($167 per month).

John Nielsen, managing director of Automotive Engineering and Repair for AAA says, “The total cost of owning and operating a vehicle averages more than $8,500 a year, and many Americans fail to take into account all of the expenses.”

To offset cost, members may put credit unions at risk

How can members make monthly payments manageable with dwindling savings and limited real income? Some may opt for longer financing terms, which not only incur more interest in the long run, but increase the likelihood of damage (or loss) to the lender’s collateral. Plus, lengthy financing terms expose members to the dramatic effects of vehicle depreciation, making it more likely they will walk away from unpaid loans in the event of vehicle loss.

How credit unions can be good travel buddies

Financial security is directly linked to your members’ ability to pay back their loans. Even though times are tight, there are things your credit union can do to ease the economic burden of a vehicle owner’s financing journey.

Stay in touch

Effective communication regarding loan terms, due dates, and payment options aids in building a solid relationship between you and your members. Send a follow-up letter thanking them for their business and inform them of resources and additional products or services you may offer. You may be surprised to find that such a support system encourages members to reach out before defaulting.

Educate them

Consider sharing financial literacy topics, like budgeting and healthy spending habits. This helps to empower borrowers with the foundational spending and saving knowledge they need to make more informed money moves.

Leverage technology

Utilize tools to detect payment issues early. Like effective communication, technology may prevent the build-up of large financial obstacles, alerting your credit union to early delinquency cues so you can intervene with proactive communication when necessary.

Protect your portfolio

Credit unions typically leverage collateral protection insurance (CPI) to protect their interest in a vehicle in the event a member tries cutting costs by dropping comprehensive and collision coverages. While this coverage offers protection for your credit union’s portfolio, the price structure of traditional CPI policies can be financially burdensome for members.

Our hybrid CPI solution is less cost-prohibitive than traditional CPI. Its member-focused pricing structure features a flat monthly premium that enables drivers to maintain their payments without feeling the pressure of a costly policy.

Stay relevant in a challenging market

If your members opt for a new vehicle this car buying season, they’ll have enough problems to worry about on the road. Give them the peace of mind they need to operate and maintain their vehicles with confidence. Visit our website to see how you can be a trusted companion in a highly challenging auto finance market.

Michael Dippo

Michael Dippo

As Senior Vice President of Lender-Placed Auto, Michael works closely with SWBC’s Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages. He is responsible ... Web: Details