Credit unions expected to remain an auto lending force

Credit unions beat out rivals for auto financing market share during the fourth quarter of 2022, and dealership finance and insurance offices should expect them to remain strong competitors this year.

Dawit Kebede, senior economist at the Credit Union National Association, said credit unions achieved 21 percent growth in auto loans last year.

"Best. Year. Ever" is how Josh Amaton, vice president of CUDL dealer client experience, summed up 2022 for credit unions in auto lending.

The association expected more growth in 2023, though not to that degree, Kebede told Automotive News last week.

The organization has predicted credit union auto lending will grow 8 percent this year, Kebede said. However, that projection predates the recent U.S. banking industry upheaval, which could cut into credit union loan growth, he said.

"We still expect consistency from our credit union lenders," Amaton said in January. "We expect them to have stable growth in '23."

Credit unions ended 2022 by writing 27 percent of the combined pool of auto loans and leases originated during the fourth quarter, according to Experian. It was the largest market share among all major auto lending segments, Experian said.

The quarter saw credit unions ranked No. 3 in new-vehicle financing, behind captive finance companies and banks, according to Experian. However, credit unions' share grew 6 points from the same time a year earlier to control 20 percent of the combined book of new-vehicle loans and leases. That's within striking distance of banks, which came in second place, at 24 percent; captives and banks both lost market share.

Credit unions handled 31 percent of used-vehicle financing during the fourth quarter, more than any other lender class, according to Experian.

Historically, credit unions have offered lower interest rates than banks, but the spread between the two segments has become more pronounced, according to Experian.

New-vehicle borrowers in the first quarter of 2022 committed to pay credit unions an average of 3.5 percent interest, the same rate available at captive finance companies and a point better than banks offered, according to Experian. By the fourth quarter, credit unions financed new vehicles at 5.3 percent interest on average, 0.1 point cheaper than captive finance companies' rates and 1.6 points better than what banks offered.

Credit unions charged 5.2 percent interest to used-vehicle borrowers during the first quarter of 2022, 1.6 percentage points better than banks and 2.1 points less than captive finance companies. By the fourth quarter, used-vehicle loans at credit unions carried 6.9 percent interest rates, 2.2 points lower than captive finance companies and a 2.4-point improvement over banks.

The spread could be even more dramatic in lower credit tiers. For example, Equifax data cited by the credit union association found the median deep-subprime customer in October received an 8.8 percent interest rate on a 72-month loan from a credit union, 2.5 percentage points lower than what banks offered and 9 percentage points lower than captive finance companies.

Melinda Zabritski, Experian's senior director of automotive financial solutions, said in a statement in March that "The biggest driver of credit union growth was lower interest rates, for both new and used vehicle financing."

Zabritski this month said credit unions continue to be highly competitive in 2023, though the interest rate spread between credit unions and other lenders appeared to be shrinking.

Lower credit union interest rates can make it more difficult for F&I departments to profit from vehicle financing. For example, none of a dealership's partner lenders might be able to beat a credit union's rate, or doing so would require the dealership to forgo its reserve margin.

"It is a major issue," Marvin Eleazer, finance manager at Langdale Ford in Valdosta, Ga., said of the rise in credit unions.

Credit unions are nonprofits that focus on members, don't have to pay federal corporate income tax and use deposits to fund loans rather than having to pay for capital to lend. Such factors can allow them to be highly competitive on rates.

Kebede said a large influx of deposits during the COVID-19 pandemic left credit unions with significant capital to lend. Savings slowed in 2022 but still rose 4 percent, he said, and are forecast to grow 6 percent in 2023.

Eleazer told Automotive News in March that his dealership has an indirect lending relationship with four credit unions, but three of them lack competitive rates, nor do they permit a dealer margin for handling the loan. The fourth credit union does permit a margin, but Eleazer said he rarely adds it, as it would render the loan uncompetitive.

"The customer's gonna go elsewhere," he said.

Eleazer said Langdale Ford might still be able to sell the customer F&I products in a deal involving a direct loan from a credit union. But some credit unions will ultimately persuade the customer to substitute their own products for the dealer's, Eleazer said.

"That just creates enmity," he said.

However, Jack Schmidt, principal of Jack Schmidt and Associates, a dealership financial consulting firm, said Adventure Subaru in Painesville, Ohio, had been able to manage the competition from credit unions by focusing on F&I products.

Adventure Subaru, where Schmidt has a financial role, doesn't try to dissuade the customer from using a credit union. Its F&I pitch instead seeks to have the customer add a service contract, guaranteed asset protection and maintenance plan to the order the buyer will take to that lender.

"And then they're told, 'So if we do it this way, you can put it in with your loan with your credit union,' " Schmidt said in February. "And we've had considerable amount of success doing it that way."

Schmidt called credit unions receptive to financing the coverages on direct loans.

Thomas Castriota, dealer principal of Castriota Chevrolet in Hudson, Fla., called credit unions "very strong" in his Tampa Bay-area market.

Castriota handles the competition from that segment by asking customers who wish to finance with a particular credit union to do so in an indirect loan handled by the retailer rather than go directly to the lender. That way, Castriota Chevrolet receives the deal funding more quickly.

"We find that to be pretty successful," he said. "I would tell you that works probably 9 out of 10 times."

This strategy might sacrifice dealership reserve to match the direct rate, but it offers the store the convenience of faster funding and the ability to control the deal, Castriota said.

"You would rather the consumer being with you than to walk out the door saying, 'I'm taking this to my credit union,' " Castriota said.

Bob Parry, finance director at Tyrrell Auto Centers in Cheyenne, Wyo., said his group has found success partnering with credit unions on indirect loans.

"The customers are gonna use them, so why not use them?" he said.

Parry said Tyrrell's credit union partners will finance the retailer's F&I products and pay the store a "flat" for arranging the deal.

"We can still make money using the credit unions," he said.

G.P. Anderson, finance manager at Thielen Motors in Park Rapids, Minn., said he told his sales staff to make sure the dealership still has an opportunity to present its financing options to a credit union customer. But he doesn't make the conversation adversarial or encourage the customer to take a higher rate and refinance later.

Anderson recalled trying to overcome a credit union's 5.49 percent interest rate on a 36-month loan to a customer with good income and excellent credit. He sent the deal out and was able to obtain a 6.2 percent rate. But when the customer checked with the credit union — at Anderson's encouragement — he discovered another 0.25-point discount was available.

Anderson said he told the customer: "That's a great rate. Go ahead and do that. I can't even get close to that."

But he was able to still sell the customer a service contract and tire-and-wheel protection.

"The thing about it is you control what you can control, and you can't control what you can't control," Anderson said.