As 2018 draws to a close, it’s time to assess the state of the automotive industry. Factors impacting the automotive industry reveal good and bad news for the industry, while also identifying growth opportunities for credit unions.
The U.S. economy continues to be strong as evidenced by a record high stock market, robust GNP growth, low inflation and record low unemployment. Those factors, combined with record low interest rates that have lasted almost a decade, have resulted in a strong automotive market. Car and truck sales in the U.S. that bottomed out to only 11 million annual units at the height of the great recession in 2009, steadily increased to 18 million units in 2016, and have remained at that level. Put simply, the auto market has never been stronger than the past decade.
However, these stable times are at risk. Automakers are reporting declining sales in the United States. Ford, Toyota, Nissan and Honda reported sales declines in September of 11.2%, 10.4%, 12.2% and 7.0%, respectively. The Federal Reserve has raised interest rates three times in 2018 and is expected to increase them further in 2019. This has increased the average APR on a vehicle loan in September to 5.8%, compared with 4.8% a year ago.
Another factor to a diminishing automotive industry is the increased tariffs on foreign goods, including steel, that will increase vehicle costs and impact sales. If tariff levels increase again next year, costs will rise more. This may put additional pressure on finance rates.
However, all hope is not lost. Even as the overall automotive market may be shrinking, credit unions are in a good place to thrive as they continue to grab a greater share of vehicle loans. In only five years, the percentage of loans made by credit unions has increased from 14.7% to 20.4% – a 39% increase. One area credit unions can expand their market share can be found within the highly attractive auto lease market.
Rising interest rates increases the monthly cost of a new vehicle, making leases a more appealing option. Leasing among car buyers continues to grow with over 30 percent of all new vehicles being leased. Leasing allows customers perks that include driving a new vehicle every three years with no-money down, and a lower monthly cost that provides the ability to afford a more expensive vehicle with newer technology. These factors are important to millennials, who are the fastest-growing market in the auto business.
Credit unions that offer a lease product will benefit for multiple reasons, such as:
- Zero-percent offers at POS dealers are sharply declining, increasing the monthly payment and in turn, pushing more consumers towards leasing;
- The first half of 2016 experienced highest lease volume in history. Many of these leases are maturing in early 2019, so the opportunity is there for new auto leasing;
- Credit union leasing members are typically high-quality customers with A+ credit that prefer shorter terms, thereby lowering the credit and interest rate risk associated with any loan portfolio.
In summary, a rising rate environment can be challenging for many credit union’s traditional growth plans as they enter 2019. Auto leasing is an opportunity that should be strongly considered in any evolving rate environment. Leasing is only going to continue to grab more market share. Plus, with a greater emphasis on lower payments that accompany a rising rate environment, leasing will continue to strengthen profitability for a credit union.