Credit Unions Must Reverse Auto Loans Downward Trends
Credit unions have historically been major players in the auto loan market, renowned for offering competitive rates and personalized service. In 2021 and 2022, they successfully used aggressive pricing tactics and customer-focused strategies to make meaningful gains in the vehicle financing market share. However, in 2023, credit unions experienced a 5% decline, leading to increasing concerns regarding their future competitiveness. In this article, we will discuss several strategies for credit unions to regain their market share in the auto lending market.
Go All-In on Electric Vehicle Lending
The auto industry is undergoing a transformative shift towards electric vehicles (EVs). This shift presents both opportunities and challenges for credit unions. Credit unions should adopt a disciplined approach to capitalizing on new opportunities in auto lending. The involvement of credit unions in electric car lending is still emerging, with Tesla's relationships with some lenders being one of the best-known examples.
Electric vehicle demand behaves differently than conventional vehicle demand, and the market dynamics are still evolving. Predicting residual and resale values for EVs is complex, influencing loan pricing and risk assessment. Credit unions must develop expertise in this area to serve the growing EV market effectively.
Be Flexible: Offer Different Pricing Tiers to Adapt to High Interest Rates
Another critical factor influencing auto lending is the macroeconomic environment, characterized by high interest rates. Captive lenders are particularly affected as they grapple with increased costs of funds. In response, captives are now focusing on pricing strategies to maintain competitiveness.
High interest rates also impact consumer behavior and demand. Consumers may become more price-sensitive, leading to changes in borrowing patterns. Dealers face challenges in pricing cars due to fluctuating market conditions and high vehicle prices, affecting loan demand.
To ensure customer satisfaction, credit unions must find the gray area between price sensitivity and profitability, especially when targeting highly-elastic super-prime customers. Lenders often aggressively pursue these customers due to their low default risk, but often the aggressive pricing strategies shrink profit margins.
On the other hand, credit unions are expanding loan volumes to lower FICO score borrowers, adapting to changing market conditions. This strategy can help credit unions grow their customer base, but careful risk management and pricing granularity are required, especially for subprime lending.
Prioritize Transparency and Accessibility
Transparency and accessibility are critical elements of credit union lending practices. CUs must be cautious about perceived discrimination in lending, which can damage a credit union's reputation and regulatory standing. Clear communication about loan decision factors is essential to maintain trust and compliance.
Pricing science can help lenders maximize profitability while achieving their goals. This involves using data analytics to refine pricing models, making loans more attractive to a broader range of borrowers without compromising financial stability.
Embrace Technology Integrations
In a crowded market, specialization can be a key differentiator. Credit unions can focus on niches like motorcycle loans, wheelchair-accessible vehicles, or other areas to stand out and attract dedicated customer segments. Tech companies in the space are demonstrating rapid growth in auto lending by acquiring mainstream lenders' dealer networks. This move highlights the potential benefits for credit unions that embrace technological advancements.
Outsourcing auto lending to access cutting-edge technology and leveraging third-party expertise can give credit unions a competitive edge. Integrating advanced technology like Earnix or Fiserv and leveraging data analytics can help credit unions unlock new potential and continue serving their members effectively in the evolving auto lending landscape.
Get Back in the Auto Loan Fight
Due to intense competition and evolving market conditions, credit unions are encountering growing difficulties in the auto lending market. To stay competitive, they can adopt several strategies: embracing electric vehicle lending, adjusting to high interest rates with varied pricing tiers, prioritizing transparency and accessibility in their lending practices, and focusing on niche markets and technological integration.
Data analytics and advanced technology will enable credit unions to make informed decisions, provide personalized service, and maintain their strong presence in the auto lending sector.
About Author:
William Ely is Banking Solutions Architect for Earnix, a global provider of insurance and banking operations solutions.