Increasing numbers of Americans appear at risk of going upside-down on their auto loans, meaning they’d owe more than the car is worth. And many of these Americans might be your members.
The market forces that put people into this predicament also make it less likely consumers can repay the loans if they totaled their vehicles in an accident.
If your credit union’s auto loan portfolio mirrors the national trends toward larger loans and longer terms, many of your members will be at risk.
Front-line employees are well-positioned to explain to members how they can put themselves on better footing.
Financial safety nets shrink
For the most part, Americans have kept current on their auto loan payments. But a growing percentage appears to have little or no financial safety net.
According to McKinsey and Co.’s December 2014 Consumer Sentiment Survey, 40% of Americans said they were living paycheck to paycheck. That’s up from 36% in 2013, and 31% in 2012.
Similarly, 34% of survey respondents in 2014 said they had a decreased ability to make ends meet, up from 32% in 2013 and 27% in 2012.
More than half of members are concerned they don’t have enough savings set aside for a rainy day, according to CUNA’s 2014 National Member and Nonmember Survey—and nearly 40% are “very” or “somewhat” concerned about an adult in their household losing his or her job.
This insecurity doesn’t just pertain to big-ticket items. Only 38% of Americans report having enough savings to pay for unexpected expenses such as a $500 car repair, according to a Bankrate.com survey.
Someone thousands of dollars upside-down on an auto loan faces a significant burden if the car is totaled and he or she can’t pay off the loan out-of-pocket.
Lengthening an auto loan term generally increases negative equity. And the higher the loan amount, the higher the risk for members and your credit union.
Consider these statistics:
The impact of gas prices
Another market force increasing the risk of negative equity for new car buyers is the price of gas. Low gas prices—combined with a rough winter—continue to boost sales of trucks and SUVs, according to Edmunds.com.
Not only are these vehicles typically more expensive, their value tends to plunge as gas prices increase. On the flip side, the value of some electric cars has fallen rapidly as gas prices dropped.
Members might believe manufacturers’ claims about what vehicles best hold value, but gas prices and many other unforeseeable variables can dramatically affect residual values.
Car dealers, captive lenders, and finance companies are happy to pressure buyers into high-margin Guaranteed Auto Protection products—which cover the difference between insurance claim reimbursement and outstanding loan value—whether or not buyers need coverage.
Set your credit union apart by explaining these risks and providing reasonably priced protection, available from your credit union.
RICH TRACE is a lending product management director for CUNA Mutual Group.
This article first appeared in Credit Union Front Line newsletter, the monthly sales and service newsletter for branch staff and their managers.