In addition to the shortage of new vehicles from manufacturers, the emergence of digital used-car traders has contributed to used-car price increases. Online providers such as Carvana and Vroom expanded the geography of competition from local dealerships to nationwide.
Consumers can sell cars from the convenience of their homes or buy them from a wider selection and then wait for delivery. This convenience also proved to be useful when social distancing orders made it difficult to visit dealerships.
Used-auto loans are an important part of credit unions’ loan portfolios. In 2020, they represented 63% of total outstanding auto loans, similar to the industry average of 62%.
During this period, used-car loans grew 4.5%, up 40 bp from 2019. Despite unusually high prices, used-auto loans grew 4.2% over the first half of 2021.
The auto lending outlook for the remainder of 2021 and 2022 is strongly linked to the likelihood of supply stabilization in the auto industry. IHS Markit predicts light vehicle production will approach its pre-pandemic level by 2022, with slight improvements expected by the end of 2021.
There is some evidence that demand for used vehicles is cooling down. Moody’s Analytics reports the third round of direct stimulus payments led to many households purchasing vehicles in April 2021. This resulted in the biggest monthly used-vehicle price increase of 11.6%. Since that time, it started to decelerate and even reverse.
Another important trend in the last five years is the shift in consumers’ taste in vehicles. An Experian report shows that Americans’ preference for crossover utility vehicles (CUVs) and sport utility vehicles (SUVs) increased 45% since 2016, while their preference for automobiles declined 39%.
This shift in preference increased loan balances and monthly payments. The average new loan amount for CUVs and SUVs increased 15% in 2020.
Credit union delinquency and net charge-offs were expected to increase due to the economic downturn as COVID-19 started to spread in early 2020. In response, credit unions increased their loan loss provisions in anticipation of higher nonperforming loans following massive layoffs in March and April of 2020.
However, strong fiscal and regulatory response by the federal government to prevent the economic fallout due to the pandemic also kept loan quality healthy, contrary to expectations. Around 85% of U.S. households received three rounds of direct stimulus payments from the government.
In addition, extended unemployment benefits and loan forbearance rules reduced the propensity of loan defaults.
The Census Bureau’s Household Pulse Survey indicated 60% of adults used the second direct stimulus payment to pay down debt. Hence, these interventions reduced delinquency across all loan types.
Experian data on the state of automotive financing also showed that subprime financing is near record lows while prime lending is increasing. Sixty-five percent of auto loans in the first half of 2021 went to prime and superprime borrowers, compared to 60% in 2019.
Conversely, the share of loans going to subprime and deep subprime borrowers declined from 24% to 18% during the same period.
In 2020, credit unions’ delinquency rate (more than 60 days) fell from a pre-pandemic rate of 78 bp to 59 bp, and from 44 bp to 36 bp for used- and new-auto loans, respectively.
Similarly, net charge-offs for new-auto loans decreased from 40 bp to 36 bp, and from 66 bp to 50 bp for used-auto loans.
CUNA economists expect delinquency and charge-off rates to rise slightly by the end of 2021 and in 2022 because government support that improved loan quality has ended. Nonetheless, these rates will still be close to long-run averages.
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