Lending Perspectives: There’s no such thing as a free (car) ride, part two

The car market is changing rapidly; here are some thoughts on forecasting the financial impact for your credit union.

Last month I shared some basic methodology using “back-of-the-napkin math” to address what your credit union is likely facing: falling used car values. In reality, what all auto lenders are experiencing now is a double whammy. Not only are prices falling, lowering the amount realized at sale when you repossess a car, but the extremely strong values of late 2020 into 2022 mean your members likely financed a much larger loan than historical trends, regardless of whether your credit union experienced higher loan-to-values. Translation: Two factors drive higher losses. But there’s more to forecasting your future losses.

My previous napkin math only addresses magnitude of loss—how much we’ll lose on every repossession. It doesn’t address what happens if we experience more repossessions. That said, watch for these leading indicators which might drive up repossessions:

  • Gas prices
  • Job losses
  • Voluntary repossessions

As an amateur economist, I know this: History has a way of repeating itself. I was rather worried about auto loan performance in 2022 when I saw gas prices cross over $5 per gallon because I remember observing an increase in repossessions in 2007 and 2008 as gas prices surged to $4 per gallon before the financial crisis. Fifteen years ago, each increase of $.25 per gallon saw another spike in cars coming back.


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