Data Driven Marketing

Auto Loans at Credit Unions: 3 Surprises, 3 Risks, 3 Opportunities

Auto Loans at Credit Unions: 3 Surprises, 3 Risks, 3 Opportunities

April 16, 2024 | Tammy S. Vanwambeke

When asked where to get an auto loan, a credit union might not be the first answer. But, credit unions are in fact a quite popular choice for auto loans. Credit unions often offer: 

  • lower interest rates, 

  • more flexible repayment terms, 

  • and more flexible credit standards.

When we looked at data published in our March 2024 issue of the Auto Lending Industry Trends and Insights report, we discovered exactly how popular credit unions are for auto loan financing. And we were surprised at who is obtaining auto loans from credit unions. At the same time, we also noticed a few auto loan related trends that could be cause for concern. These findings provide helpful insights that credit unions can use to guide their auto lending strategies and grow member relationships. Let’s take a look.

Surprise #1: Auto loan balances at credit unions are HIGH!

The outstanding auto debt at credit unions was $466.1B, as of February 2024. What’s astounding about that figure is that it is not far behind total auto loan balances at banks ($525.6B) or captives ($536.2B). Based on this, credit unions hold 28.6% of outstanding auto debt, whereas banks and captives each hold a bit above 32%. Did you know that credit unions hold such a significant portion of outstanding loans?

Surprise #2: Auto loan balances at credit unions increased. Balances at banks decreased.

Looking at year-over-year data, auto loan balances at credit unions increased by 4.1%. During the same time period, balances at banks decreased by 2.2%. Why would this be? 

Perhaps consumers find credit unions easier to work with and more understanding of their individual financial situations. Perhaps banks have tightened their lending standards based on recent economic factors, whereas credit unions prioritize the borrowing needs of their members and have not moved quite as fast to change their standards. It is likely a combination of these, along with broader institutional goals and other factors.

Surprise #3: Which generation prefers to get auto loans from credit unions the most? Gen Z!

When we look at generational preferences for auto loan originations, it is Gen Z that turns to credit unions the most - more than any other lender type. About 31% of Gen Z auto loan originations were at credit unions in the last year, followed by 30% at captive and 24% at banks. On the flip side, Baby Boomers were the least likely to prefer credit unions for auto loans. Although, 25% of Baby Boomers still turned to credit unions for their auto financing needs.

Let’s take a look at some recent auto loan data that could be indicators of future challenges for credit unions.

Risk #1: Share of auto loan balances amongst subprime segment is on the rise

About 16% of auto loan balances held at credit unions is comprised of subprime consumers, as of February 2024. That’s a 13% increase over a year ago. It is the highest percent increase across all lender types. Banks only saw an 8.1% increase; captives only a 3.9% increase. While credit unions increased their auto loan balances (surprise #2), some of this bump could be from consumers with lower credit or that shifted to lower score bands. Both of which present more risk to the portfolio.

Risk #2: Auto loan originations at credit unions decreased by 22% from last year

While there were 6.5 million auto loan originations at credit unions year to date as of December 2023, that number is down 22% from the previous year. Let me say it again - down 22%!  That’s the highest percent decrease of any lender type. Originations at banks were down 9.3%; captives increased by 17.4%. Are credit unions at risk of losing share for new auto loans?

Even though originations were down, auto loan balances were up year-over-year (surprise #2). Could this be due to higher loan amounts for higher priced vehicles? Is it because existing loans are staying on the books for longer? These could also be risks for credit unions. 

Risk #3: Auto loan delinquencies at credit unions are on the rise

While only 0.9% of auto loan accounts at credit unions were 60+ days past due as of December 2023, this is up almost 26% from last year. That’s over double the percent increase in delinquencies for auto loans at banks and captives.

So what can credit unions do? How can they capitalize on the ‘surprises’ and offset potential financial implications from the ‘risks’?  Here are 3 ideas.

Opportunity #1: Use consumer financial insights to grow new member relationships

Many consumers join credit unions to gain access to preferred rates and terms for a new auto loan. Whether they worked with the credit union directly to set up loan financing, or an auto dealer referred them, these consumers are starting their member relationship with one product - an auto loan. 

Credit unions want to keep these new members. They need to deepen engagement so these new relationships will turn into long-term, ‘sticky’ members. 

To help, credit unions can gain a broader view of new members’ overall financial position and needs. By analyzing consumer financial insights, credit unions can discover more about new members’ likely affluence, spending habits, ability to meet debt commitments, and more. Then, credit unions can better match and promote additional products and services beyond auto loans to these new members. For example:

  • Promote deposit services: Credit unions can discover new members’ likely deposits held at other firms. Then they can offer those with the most deposit growth potential new banking services - such as high interest rate CDs or incentives to open new checking accounts. 

  • Offer appropriate credit cards: Credit unions can segment new members by their likely discretionary spend, credit profile, ability to pay debts, and card benefit preferences. Then, they can deliver messages and offers for new credit cards, perhaps with enticing introductory rates or other benefits.

Credit unions need to take fast action. By engaging new auto loan members with additional products that meet their needs, credit unions are more likely to solidify relationships and build loyalty.

Opportunity #2: Better assess ability to borrow and meet financial commitments

Rising auto loan balances amongst subprime members and rising delinquency rates are both cause for concern. To minimize risk associated with these red flags, credit unions need to take a more proactive approach. They need to gain a more holistic view of prospects’ and new members’ ability to both take on new credit and to pay debt commitments. 

In order to better evaluate new auto loan borrowers, credit unions need to consider these questions:

  • How much other debt do these consumers hold? Are they under financial stress?

  • Are they dealing with newer debt commitments, such as student loans?

  • Do these consumers pay their everyday bills on time?

  • What is their employment and income track record?

  • Are there other attributes beyond credit that might affect offer terms?

  • How might a new borrower cope if they are faced with an adverse economic climate or job loss?

Credit unions can explore a variety of alternative data and financial insights to better evaluate consumers seeking new auto loans. Plus, they can apply this data to their current loan portfolio to identify segments that present increased risk of delinquency and default. Then they can take appropriate action to help those members.

Opportunity #3: Focus more marketing efforts toward Gen Z 

Wow again - Gen Z consumers prefer credit unions for auto loans! What is it about credit unions that attracts this young audience? Is it that their frequent online research has helped them discover that credit unions often offer lower interest rates? Or is it something else? 

In any case, credit unions have an opportunity to gain more new Gen Z members - not just for auto loans, but for all financial needs. By using consumer financial and economic insights to fuel their marketing efforts, credit unions can target attractive Gen Z consumers. Namely, those likely to have higher affluence, income, and ability to pay for debt commitments. Plus they can leverage insights on Gen Z buying habits, attitudes, values, and media preferences to tailor their messages and build brand awareness amongst young audiences.

Credit unions can further enhance their targeting by focusing on Gen Z consumers within the ‘young affluent’ segment. When we look at the young affluent segment overall, they are indeed an attractive audience. Compared to other young consumers, the young affluent have:  

  • 2.4x higher income

  • 3x higher discretionary funds

  • 11.7x higher deposits

Credit unions that take extra efforts to tailor their marketing campaigns toward these young consumers are more likely to be rewarded with more young new members that not only need auto loans, but a variety of other financial services.

Fuel your auto lending strategy 

With enhanced consumer financial and alternative data insights, credit unions can better grow their auto loan business, develop new relationships, and reduce risk. Discover additional Auto Lending Industry Trends and Insights

Plus, learn more about the Young Affluent

Explore our ebook: 5 Tips to Help Credit Unions Drive Member Growth, Deepen Engagement, and Manage Risk.

All statistics from Equifax Auto Lending Industry Trends and Insights report, March 2024

Tammy S. Vanwambeke

Tammy S. Vanwambeke

SVP Financial Services and Enabling Technology

Tammy VanWambeke is a Financial and Technology services executive with leadership experience driving and sustaining growth for Fortune 500 companies. She is currently responsible for leading Equifax’s Financial Services Group inclusive of Mid Market banks, Credit Unions, Retailers, Finance Companies, Sales Agents and E[...]