By Ray Birch
ONTARIO, Calif.—The process of buying a car is getting closer to what it's like to buy a pair of shoes.
That statement, said somewhat in jest by Bob Child, carries a great deal of truth, noted the chief operating officer for CU Direct, which kicked off its Drive 19 Conference Tuesday in Las Vegas.
Child was commenting on how new types of car dealers are quickly emerging—the online shops such as Carvana, Fair, TRED and Shift. They’re gaining traction quickly with consumers, and it’s a trend CU Direct is paying attention to and one credit unions must be aware of, as well, said Child.
What makes these car shopping websites really work, explained Child, is they allow consumers to order a car, have it delivered, and if they don’t like it, or if there is something wrong with the vehicle, send it back and get all their money returned.
That ability to shop online and then first check out the real thing before officially closing the agreement is what is quickly changing consumers’ approaches toward how they shop for cars, said Child.
‘That Was Crazy’
“I remember years ago there was a dealership that would allow me to take the car home for the weekend to drive it and see if I liked it. Then, if I decided to buy it, sign the papers. If not, just bring it back. I thought, back then, that was crazy,” said Child.
It turned out to not be so crazy, with Child observing that type of arrangement only foreshadowed what has arrived in the auto-buying marketplace today. He compared the online car stores’ business models to that of some well-known online retailers.
“The Amazon and Zappos model is starting to enter into the car buying space he said. “It’s definitely changing things. I think Carvana is selling 11,000 cars a month and Fair maybe 5,000. So, yes, people are doing this. Credit unions need to be aware of this now, because the consumer mindset towards buying cars is changing, and they have other avenues, outside of the traditional dealerships to buy a car.”
What it means is the credit union must be highly digital, not only with online services to help consumers locate and make decision on vehicles, but also with loan application and closing processes.
“We are simply seeing more types of differentiated selling structures available to car buyers now,” said Child. “You’ve got Tesla, which is a non-dealership structure. So they are selling on a direct model. We are trying to get credit unions into Tesla and into places like Carvana, because things are changing, and credit unions need to be well positioned to take advantage.”
‘An Interesting Ride’
Turning to traditional aspects of car sales to date, Child termed 2019 an “interesting ride.”
“January and February were just very difficult months in the auto lending space and it was a combination of horrible weather in most of the country, the government shutdown impacting consumer confidence, and we saw an interest rate increase from the Fed,” said Child. “All that coupled together just resulted in car sales, all in all, being weighed down some.”
New car sales were down 6.5% through the end of February compared to the same period last year.
Child said entering March car sales began to pick up and he believes April will be an even friendlier month for the industry.
Still, new car sales are lagging behind last year’s totals.
“We recently had a couple large dealer groups in at CU Direct and they both confirmed with us that new car sales are down,” Child explained.
Appeal of Used Cars
One of the biggest reasons, said Child, is the appeal of high-quality used cars continues to grow. He said more consumers, even prime and super prime borrowers, are now turning to late-model used vehicles. The latest data show used car volume is up at the same time new car sales are trailing.
Meanwhile, credit unions’ overall share of the auto lending space continues to climb, last year increasing to 26.2%, from 25.1% in 2017 and 22.6% in 2016. In 2018 CUs claimed 15% of the new car lending space and 30% of used. CU Direct lenders, as a group (1,100 credit unions on the CUDL platform) continue to be the No. 1 lender in the country, having maintained that top status for more than two years. Through February 2019, CU Direct CUs have experienced -5.8% growth, but lead all other top 10 ranked lenders in total loans generated, including Capital One Auto Finance, Toyota Financial Services, Chase Auto, and Ford Motor Credit.
Child said the movement toward used vehicles continues as new car prices climb and consumers look for ways to keep the monthly payment down. He also noted used car values have not markedly declined, as predicted last year.
Contrary to Forecast
Child said many automotive industry experts had forecast used car prices, which had been holding steady last year, would decline more rapidly in 2019 due to the large number of high-quality off-lease vehicles coming back to market, plus growing demand for new technology in cars, making used cars outdated in the minds of more consumers.
“But that has not happened this year,” said Child.
He explained the number of natural disasters that struck the U.S. last year—hurricanes and wildfires—have removed many used cars from the market and softened the blow from all the off-lease vehicles returning. Child also noted that consumers’ desire for a more reasonably priced vehicle is outweighing demand for new tech in autos.
‘Great for Credit Unions, But…’
“Used car sales being above last year's volume is great for credit unions because the automakers and finance companies don't play in the used space,” noted Child, adding that used car lending has always been a strength for CUs. “You take out an entire segment of financers and credit unions can do very well. What's interesting is more members are going directly to their credit union for financing of used cars—we’ve seen an uptick in this in the last two years. I think the word is getting out that if you're looking to finance a used car, go to your credit union.”
With it becoming more difficult to attract new deposits, Child offered advice for credit unions bumping up against high loan-to-share ratios.
“Some credit unions are starting to pull back on auto lending,” said Child. “I completely understand, but my advice is to take margin where you can. I think 2019 is going to be a great opportunity for credit unions to take margin opportunities in auto lending. But credit unions need to stay engaged in auto lending—do not pull out cold turkey. Because if you leave the game, or dealers see you are not performing in a consistent way, it's a hard fight to regain that market recognition from dealers. You almost have to buy your way back, giving up margin. Pulling out cold turkey is not something you want to do because you end up paying the piper down the road.”