Auto loans are a familiar asset class for credit unions, and one that many have been active in for years. However, recent developments in auto lending have created new opportunities that may be hard to capture through originations alone.

Fueled by the pandemic, new and used car supplies are down while demand is up in both categories. With residual values on the rise and interest rates low, this is the perfect time for credit unions to fire up their auto lending and refinancing efforts. And if they can’t capture this attractive asset class through originations, they might consider loan participations as a complement to their lending strategy.

Supply shortages and rising demand

When the pandemic hit, a surge in demand for laptops and devices led to a shortage of semiconductors, which today’s automobiles rely heavily on, effectively stalling new car production. The shortage was exacerbated earlier this year when a giant container ship, the Ever Given, blocked the Suez Canal for a week, further holding up crucial shipments of semiconductors and other car parts.

Meanwhile, demand for new and used vehicles has soared as Americans have increasingly opted out of public transportation as a safety measure during the pandemic. In addition, federal stimulus programs have given consumers more available cash with which to purchase cars.

The increased demand and reduced supply has pushed new car inventory down 48% since 2020. As a result, prices have skyrocketed (the average new car price is up 15% from 2020) and auto lending has grown to record highs.

Used cars are also seeing soaring prices as exasperated new car buyers set their sights on used autos, and car owners hold on to their cars longer for fear of not being able to replace them. Even some rental car agencies, unable to refresh their fleets with new cars, have started trawling in the used car market. All of this has led to a significant increase in used car prices. Automobiles like the coveted 2017 Ford F-150 saw price increases of $10,000 over the past year, according to RateGenius.

A familiar asset class

Auto financing and refinancing is not new for credit unions. It’s an asset class they’ve been active in for years and are very comfortable with due to their secured, prime credit, and short-duration nature. And when it comes to auto refi, higher automobile prices have lowered the loan-to-value ratio of these loans, making refinancing an even more attractive sector. Without a doubt, these are loans that most credit unions would welcome on their balance sheet.

However, increased competition in the auto lending space has led to a decrease in credit union share of this opportunity. According to Experian, in Q1 2021 credit unions originated just 20% of auto loans, down from 24.5% in 2018. Meanwhile banks and captives have increased their shares over the past five years. It’s hard for credit unions to compete with some of the incentives these other players offer.

In addition, the auto lending opportunity may vary by geography. For example, credit unions in the western region of the US have a decent market share in used auto loan financing, but credit unions in the southern US are not as active in this category. Loan participations can allow credit unions to capitalize on these high performing assets, regardless of the demand in their own backyard.

Getting back into the driver’s seat

Auto loans have always been an important asset class for the credit union balance sheet. Auto loan participations provide a yield opportunity for credit unions struggling to generate auto loan originations on their own. Credit unions can maintain loan goals and generate interest income by purchasing quality, performing loan participations from fintech origination partners and other credit unions with high-volume auto lending programs.

Platforms like ALIRO have reduced the administrative burden often associated with loan participations and made it easier for credit unions to enter new markets, diversify their balance sheets, and put deposits to work.

​​Contact our team to learn more about the ALIRO network.