Five auto lending trends credit unions should track in Q4

Like so many other industries, the COVID pandemic plunged the auto finance sector into chaos, with global supply chains shuttering overnight and consumers rethinking larger purchases.

Now, four and a half years later, inventory is increasing, consumer demand is back up, and for the first time in more than four years, Federal rates have been cut. The financial ripple effects are likely to continue for some time, however.

Here are five trends credit unions should be monitoring in Q4, 2024.

1. When auto prices go up, subprime borrowers are hit hardest?

The most notable long-term effect is simply the cost of vehicles. Since 2020, new car prices have risen by approximately 22% while used car prices have increased by 40%. Initially, this leap was largely attributable to supply chain disruptions and a lessening demand for new cars, but what could or should have been a short-term price surge remains.

This has placed a significant strain on consumer wallets, with nonprime and subprime borrowers—those often most in need of financial support and solutions from credit unions—paying the most.

2. More members are locked into longer loans?

To mitigate sticker shock, many auto lenders (including credit unions) have increased their loan terms. In a recent episode of 22 Minutes in Lending , Cinch CEO, Bill Moniz, discussed that even for his prime and super-prime customer base, 84-month terms weren’t out of the ordinary.

This is up from the average 72 month-terms in 2020, and represents an additional, longer-term variable credit unions need to consider when working with their members.

3. What goes up (eventually) does come down?

Despite cost-per-unit remaining at near record highs, there has been some price reduction—but it’s not necessarily good news. When prices drop, the longer-term loans can burden members with negative equity.

In fact, 24% of new vehicles involving a trade-in and financed in 2024 were shown to have negative equity. This change has pushed the average amount negative equity to $6,255; a sharp increase from the pre-pandemic levels of $5,317.

4. Rising insurance costs also impact loan affordability

The rising cost of car insurance is adding another layer of financial strain for borrowers. Premiums are up by an average of 15% nationwide in the first half of 2024, with predictions of up to 22% by the end of the year.

Many members are struggling to afford both their car payments and insurance. This increase in rates is contributing significantly to the overall increase in vehicle ownership costs. Accordingly, this trend also disproportionately affects subprime borrowers, who are already stretching their budgets.

4. Members juggle prioritizing bills and payments?

With inflation continuing to squeeze household budgets, many Americans are struggling to keep up with their debt payments. As interest rates remain high, delinquencies, especially in the 30 to 59-day range, are becoming more common among subprime borrowers.

As more members have to make tough choices many are more likely to prioritize essentials like utilities, rent, and phone bills as well as mortgages over auto loans.

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