Navigating turbulent times

Changes in consumer behavior, auto industry impact auto lending future.

November 7, 2022

A large shift in the auto industry that compares to the days of the Model T coupled with an economic environment not seen in 40 years has resulted in an auto lending industry that is rapidly changing and full of unknowns. 

“For all of the challenges, this is one of the most exciting times to be in auto lending,” Jason Tepperman, chief lending officer at Caribou, said during a breakout session at the 2022 CUNA Lending Council Conference Thursday in San Diego. 

Even with the changes, Tepperman says credit unions are well-positioned to be competitive in the auto lending market—either direct, indirect, or refinancing. However, consumer behavior is also changing. They are: 

  • Getting smarter. In 2022, 25% of consumers looked to refinance their vehicle loan six months after purchasing the vehicle compared to 19% in 2020. That increased to 48% after 12 months, according to Caribous research. This is an opportunity for credit unions to explore refinance opportunities with members who didn’t finance vehicle purchases through the credit union. 
  • Becoming more discerning. Consumers want a smarter deal and transparency on financing. When selecting a financing offer, Tepperman says those who seek refinancing that features a term extension, 29% are looking for a moderate term extension to balance the monthly payment while 18% are seeking to minimize a payment.  
  • Wanting value. Credit unions offer members value because they deliver savings as a result of lower interest rates. This value allows the credit union to build relationships with members and therefore, the opportunity to cross-sell the members into other products. “Consumers increasingly understand value,” he says. “That will bolster loyalty and retention no matter what the future holds.” 

While consumer behavior is changing, the state of the auto industry is also changing in a way that will impact future auto lending, Tepperman says.  

Electric vehicles are beginning to take hold. In 2020, electric vehicles accounted for 2% of the auto vehicle share and increased to 6% in 2022. However, Tepperman says that by 2030, electric and hybrid vehicles are expected to make up the majority of vehicles on the road. This will mean credit unions may need to rethink auto lending, including determining new ways to serve members and the new risks electric vehicles present. 

Tepperman says three factors will impact the residual value of an electric vehicle: 

  • Battery life. Battery life between charges, battery replacement life, the cost-effectiveness of replacing batteries are all issues that must be address. 
  • Obsolescence. Consider the driving range. The consumer preference is 300 miles between charges; however, current batteries provide about 200 miles per charge. As batteries improve, the cost of battery will decline and drivers will be able to travel further on a single charge. But what will that mean for the residual value of an older model? 
  • Maintainability. Electric vehicles undergo less wear and tear and maintenance costs. The vehicle’s software will also provide a new path to upgrading the vehicle without having to upgrade the vehicle’s hardware, such as an engine.