The automotive credit market has reached record-setting heights in recent months—and credit unions drove a big part of the boom.
In addition to gaining market share, credit unions managed to create stability in their overall automotive portfolios with delinquencies and charge-offs, which are both significantly lower than industry averages.
However, this lending segment did something that was slightly out of character during the second quarter. On average, credit unions increased their appetite for risk, delving further into the deep-subprime market than normal.
Despite the slight change in behavior, credit union auto loans still go to consumers with higher average credit scores than loans from other lender types.
During the second quarter, the automotive credit industry reached an all-time high for outstanding loan balances. According to Experian Automotive’s latest State of the Automotive Finance Market report, the total dollar amount of auto loan balances outstanding hit $839.1 billion, up 11.7% from the previous year.
Credit unions also reached an all-time high for outstanding auto loan balances of $191 billion in the second quarter, up by $25 billion (14.9%) versus the same period in 2013. This was the second-largest dollar volume growth for any lender type, trailing banks, which were up by $31 billion.
As it pertains to the market share of total automotive loan originations, credit unions saw the biggest percentage gain, jumping 9.1% to 16.7%. Captive finance companies saw their share jump by 7.5% while banks, finance companies, and buy-here-pay-here dealers all saw their market share fall.
Credit unions also gained share in both new and used vehicle loans, with new auto loans increasing 16.8% and used auto loans rising 7.5%. Credit union market share for each loan type reached 10.1% and 22.4%, respectively.
CUs delve deeper into subprime
It would be much easier to pick up market share simply by lowering lending standards and taking on car buyers with damaged credit.
While credit unions did increase their percentage of loans to customers with deep-subprime credit scores, it was a relatively small increase. For used vehicle loans, credit unions provided 5.1% of their loans to deep-subprime customers in the second quarter, compared to 3.4% during the same period in 2012.
For the most part, credit unions still work with customers with higher-than-average credit scores. The average credit score for new vehicle loans from a credit union was 711, which was just slightly higher than the industry average of 710.
For used vehicle loans, the average credit score for a credit-union member was 680, significantly higher than the industry average of 644.
By focusing on relatively lower-risk customers, credit unions were rewarded with the most stable loan portfolios in the auto lending industry. In the second quarter, 60-day delinquencies for credit unions were 0.31%, which is half the industry average of 0.62%.
CUs have the best rates
With a new vehicle portfolio that caters to consumers with slightly higher credit, credit unions also see higher-than-average loan amounts. In the second quarter, the average loan amount for a new vehicle loan from a credit union was $29,789, compared to the industry average of $27,429.
However, credit unions kept their customers’ monthly payments close to the industry average ($472 for credit unions, $467 for the rest of the industry) by offering the lowest interest rates in the industry. New vehicle rates from credit unions averaged 3.8%, compared to the industry average of 4.6%.
Plus, credit unions offer longer-than-average terms (70 months compared to the 66-month average for the industry).
For used vehicles, credit unions had loan amounts, monthly payments and interest rates significantly lower than industry averages. Credit unions’ average amount financed for a used-vehicle loan was $17,843, compared to an industry average of $18,258.
Monthly payments for credit unions’ used vehicle loan customers were just $321 per month compared to the industry average of $355. Again, the low payments were made possible by industry-low interest rates of 5.74%, compared to 8.82% for the industry as a whole.
Credit unions for the most part have stuck to their tried-and-true formula. They work with stable members and offer the best rates in the industry. Given its record-high dollar volumes and stable delinquency rates, this formula is obviously working.
However, the slight uptick in deep-subprime loans might be an indicator that the credit union segment is willing to stick its toe a little deeper into the water. If their delinquency rates stay low, it’s possible that the credit-union segment of the industry might be willing to take more calculated risks.