By Ray Birch
ONTARIO, Calif.—The used car market is a “goldmine” now for credit unions, according to one analyst who is encouraging CUs to strengthen their relationships with dealerships to help them move a growing inventory of used cars off their lots.
CU Direct COO Bob Child told CUToday.info several lanes have merged to help turn around the fortunes of the used car market in 2018.
“A number of things have happened this year, some expected and some not,” said Child. “One thing that is no surprise is interest rates have continued to go up. They will probably go up again before the year is out.”
When those rising rates are coupled with a sharp pullback on new car incentives from the automakers and moves by several big banks—including Chase and Wells Fargo—to back off the gas pedal on car loans, the result is increased costs on new cars for consumers, Child explained.
As a result, added Child, many of those same consumers are looking to buy a one-year-old, well-maintained, low-mileage auto instead of something new off the showroom floor.
“They need to find a way to keep that monthly payment where their budgets need it to be,” said Child.
Dealerships are already recognizing the growing consumer interest in used cars and the steady hold in values, noted Child. He said that has encouraged many dealers to keep more used cars on their lots instead of selling them at the wholesale auction lanes.
“And then we have had all of the hurricanes—Harvey last year, and Michael and Florence in 2018—which drove up the need to have a lot of cars replaced. The storms drove up demand for used cars,” Child said.
Although forecasts have suggested used car values will eventually begin to decline, all of the aforementioned factors are not just propping up used car values for now, in some vehicle classes values have even been climbing, a development that surprised analysts. Most experts at the start of the year predicted used values would decline at a faster pace than in 2017 due to the large number of well-maintained, low-mileage cars coming off lease—the result of the sharp growth in leasing over three years ago. CU Direct data show that three-year-old vehicles are now worth 4.8% more than they normally would in a typical depreciation environment.
The Good News
All of this is good for credit unions, known for their attractive used car rates and terms, said Child.
“I saw a comment in Automotive News from the CEO of Hyundai who said that rising rates and the pullback from automakers on their incentives is driving volume to credit unions,” said Child.
CU Direct data also show the credit union share of the used car market continues to climb, jumping from 26.7% in Q2 2017 to 28.8% in the second quarter of this year. In that same period credit union share of overall new car financing advanced to 14.3% from 12.7%.
CU Direct credit unions as a group remain the number-one lender in the U.S., with 1,045,840 loans booked this year (through Sept. 30), compared to second-place Ally Bank, which has 792,070.
“Again, this is a great opportunity for credit unions, if for the simple reasons that the automakers don’t play in the used car space and used car lending is a sweet spot for credit unions,” said Child.
Steps CUs Should Take
Child encouraged credit unions to take a few steps to take advantage of the growing used opportunity.
“Make sure you to work with the dealerships that are hungry for lending sources with the pullback in automaker incentives,” said Child. “Make sure your members know you offer pre-approvals, so they can walk into the dealership and walk out with a new or used car and the credit union’s financing.”
Child also advised credit unions to work closely with independent dealerships, as well, but be cautious in doing so with a recession looming in the next few years.
“All dealerships have to take out loans to cover their floor plans,” noted Child. “And as rates go up it costs all dealerships more to keep inventory on th
But when a recession hits, Child said independent dealers, often not as financially sound as the carmaker brands, can struggle and even go out of business.
“Be careful with the independents,” Child said. “Make sure you have all your paperwork before you fund that loan. In recent years all dealerships have been pressuring financial institutions for same-day payment or at the latest the next morning. In the case of independents during a recession, it also might be wise to fund a little more slowly.”