The state of auto lending

The state of auto lending

While supply chain struggles and online competitors stalled new- and used-auto lending in 2021, conditions are right for a rebound.

November 30, 2021

Credit unions’ auto loans outstanding grew a tepid 1.3% in 2020 following 2.5% growth in 2019 and six years of double-digit increases from 2013 to 2018, according to NCUA.

The COVID-19 pandemic has exacerbated the slowing trend the industry began to see at the end of the 2010s.


  • New-auto loans declined 3.6% in 2020 due to the struggling economy.
  • Demand for new cars continues to grow as the economy recovers, but supply isn’t catching up.
  • Board focus: Improving conditions for the economy and auto industry in 2022 will present better conditions for credit union auto lending.

The pandemic-induced economic activity shutdowns affected the auto-lending market in two ways:

1. Demand for credit decreased when more than 20 million people lost their jobs, uncertainty about the economy increased, and overall consumer spending declined sharply.

2. The supply of new vehicles to the market lagged the increasing demand after the U.S. weathered concerns of an extended recession.

Plant closures and a shortage of semiconductor chips due to global supply chain bottlenecks exacerbated the problem.

The Federal Reserve lowered its target range for the federal fund rate to support the economy in March 2020. This brought down the cost of borrowing for various loan types.

Credit unions’ average interest rate for new- and used-vehicle loans decreased a respective 70 basis points (bp) and 86 bp in 2020. New- and used-auto loan rates fell another 30 bp and 22 bp, respectively, during the second quarter of 2021.

In September, the Federal Reserve announced it will start to taper off its asset purchase program by year’s end with a possible rate hike in 2022.

New-auto loans declined 3.6% in 2020—not surprising considering the economy was officially in a brief recession that year. Credit union historical data shows this decline isn’t uncommon during economic downturns (“New- and used auto-loan growth”).

The supply of new vehicles lagged the increasing demand after the U.S. weathered concerns of extended recession.

Supply chain disruption

Increasing vaccination rates, reopening the economy, and improving consumer spending led to a strong economic recovery in 2021. By June, the annualized quarterly growth data showed the economy exceeded its pre-pandemic level of output.

During this same period, credit union new-vehicle loans grew 0.8%, reflecting increasing demand. Federal Reserve data also shows that demand for auto loans has exceeded pre-pandemic levels based on large domestic banks reporting consumers’ auto loan applications.

However, while demand for new cars grows as the economy recovers, supply isn’t catching up. The global shortage of semiconductor chips resulted in one of the lowest inventory levels ever for new vehicles at U.S. dealerships.

Click to enlarge. New- and used-auto loan growth.

The ratio of auto inventory to sales—0.7 in July 2021—is at its lowest point since data on this metric became available in 1993. This implies that dealerships’ ability to restock cars is slower than sales. As a result, current inventory is down 70% relative to pre-pandemic levels.

The rise of the delta variant in East Asian countries, which control about 90% of the semiconductor chip market, worsened the situation by leading to plant and port closures.

Auto companies such as Ford and General Motors have cut production and reported factory downtimes due to the shortage, while several U.S. vehicle assembly plants have remained idle for weeks.

The National Automobile Dealers Association announced that sales for the rest of the year will likely be limited by continued inventory constraints.

As a result, the global auto industry is projected to lose $210 billion in 2021, according to the global consulting firm AlixPartners.

IHS Markit predicts U.S. vehicle assemblies will fully recover from the ongoing computer chip shortage sometime in 2022 once supply catches up with demand.

This will dampen credit union auto-loan financing in 2021 due to lower vehicle supply.

On the other hand, the shortage of new vehicles increased demand for used cars, which led to unprecedented price increases in 2021. The Manheim Used Car Value Index shows prices continually increased every month from January until May. 

A comparison to previous year prices reveals the margins were as high as 50%. The increasing prices eventually started to come down, but used cars, on average, were still valued 25% higher than a year ago as of September.

NEXT: Online marketplace

Online marketplace

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.

Click to enlarge. Credit union loan growth.


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.

NEXT: Return on assets

Return on assets

Credit unions registered record high return on assets (ROA) in the first half of 2021. Reducing loss provisions set aside during the start of the pandemic, mortgage sales, and Paycheck Protection Program loans contributed to this performance.

CUNA expects ROA to decline as interest margins fall, mortgage originations decrease, and auto industry supply challenges continue.

As the second-largest loan type following mortgages, auto loans represent about a third of credit unions’ overall loan portfolio. Lost revenue for the auto industry due to supply chain disruptions also implies lost opportunity for credit unions to provide financing. This clearly has an impact on earnings.

Market share

Credit unions’ auto-loan market share during the second quarter of 2021 was 18% (24% for used-auto loans and 11% for new-auto loans), according to Experian. That’s down from nearly 23% in 2018.

Captive finance companies have dominated new-vehicle financing. These companies, which are wholly owned by auto manufacturers, provided 55% of new-car loans during the first half of 2021.

Online marketplaces such as Carvana present a growing challenge for credit unions in the used-car sector. Establishing partnerships to make use of third-party financing options on these platforms will help address the challenge.

These digital spaces provide experiences that are attractive to younger consumers, who are becoming dominant buyers in the auto market.

A report from the New York Federal Reserve shows that 62% of auto loans originated during the second quarter of 2021 went to consumers under age 49. Those under age 39 account for more than 60% of these loans.

The average age of a credit union member, however, has increased from 44 to 51 years over the last 20 years. Credit unions should address this demographic gap to increase their market share.

Improving conditions for the economy and the auto industry in 2022 will present better conditions for credit union auto lending. But credit unions need to address challenges in the marketplace to maintain and grow their auto-loan share.

DAWIT KEBEDE is senior economist for Credit Union National Association. Contact him at 608-231-5791 or at

This article appeared in the Winter 2021 issue of Credit Union Magazine. Subscribe here.