Frederick Reinhardt immediately noticed something was up – way up – last year shortly after the Federal Reserve began hiking interest rates from nearly 0% to over 5%.
And it wasn’t just the price of money.
Reinhardt, CEO and president of Greenwood Credit Union in Warwick, saw that his financial institution was issuing many more auto loans than usual.
“The number rocketed,” Reinhardt said. “We saw at least a 20% increase in volume last year between March and September.”
It wasn’t only Greenwood that reaped increased business. Credit unions all over Rhode Island and beyond saw the number of people seeking car loans from them climbing.
For the first time ever, the nation’s credit unions last year eclipsed banks to dominate the auto loan sector. Credit unions now finance nearly 30% of all auto loans, according to Experian’s fourth quarter 2022 State of the Automotive Finance Market report.
Credit unions captured 26.85% of the auto loan market in 2022, up from 21.36% in 2021, according to Experian.
Banks saw their share fall to 25.81% in 2022, down from 32.33%. So-called “captive” lenders, the financial arms of auto manufacturers, saw a slight decrease from 24.59% to 24.40%. The remaining share of auto loans was split between buy-here-pay-here lenders and assorted small finance companies, according to Experian.
“In our conversations with our car dealership partners, it became clear that the larger banks had raised their loan rates higher than the credit unions had,” Reinhardt said.
Credit unions also benefited because banks reduced their appetite to lend as interest rates climbed.
“In auto lending, the margins are so thin,” said David DeCubellis, chief lending officer at Navigant Credit Union in Smithfield. “That’s partly responsible [for the banks] cutting back.”
Credit unions are not-for-profit and owned and operated by their members.
“So as opposed to maximizing profits, we maximize the services to our members by offering lower rates,” DeCubellis said.
According to Edmunds.com, which compiles automotive industry data, the average annual percentage rate on newly financed vehicles has risen to the highest level recorded since 2008. The average APR for a car loan in the first quarter of 2023 climbed to 7%, compared with 4.4% in the first quarter of 2022.
“Since inventory levels [at the dealerships] are improving, interest rates are now topping the list of the greatest obstacles that automakers are facing in 2023 to move metal,” said Jessica Caldwell, the executive director of Insights at Edmunds.
Recently, Navigant offered a 36-month auto loan for as low as 6.24%; Greenwood offered a 36-month loan for as low as 5.64%. People’s Credit Union advertised a 4.80% APR on its website. Bank of America Corp.’s lowest advertised rate was 5.99%.
Interest rate hikes were a major contributor to the spike in the average monthly payment for a new vehicle. In the first quarter of this year, the average payment hit a record high of $730, compared with $656 in the first quarter of 2022, according to Edmunds.
Reducing the cost of financing, by even a few tenths of a percent, can save hundreds of dollars over the course of a loan.
Another reason credit unions are thriving in the car loan space: Banks generally prefer to lend money to people with higher credit ratings, the so-called “super prime” category. “And there’s a whole lot of other folks who don’t fit in that category,” said Greenwood’s Reinhardt.
“We take a more holistic approach. We don’t just make decisions based on credit scores,” Reinhardt said. “We are willing to underwrite more credit risk.”
Big banks, Reinhardt says, often bundle auto loans into automobile asset-backed securities, which are similar to mortgage-backed securities except cars are the assets held as collateral, not real estate.
“That’s why the larger institutions – Bank of America, [Citigroup Inc.], and Wells Fargo [& Co.] – are only interested in the best-of-the-best super-prime borrowers,” he said. “Super prime is what makes the pools of loans salable. As a credit union, we recognize there are a lot more other borrowers other than super prime.”
Credit unions make auto loans directly to their members. But its through their relationships with car dealers that credit unions make most of their auto loans.
“We evaluate dealerships on how they fit within our guidelines for quality vehicles, as well as quality customer experience,” said Lisa Camara, head of consumer lending at People’s Credit Union in Middletown. “The increasing availability of new cars has allowed people to trade in their used cars for new, thereby increasing the availability of used cars.”
It’s often easier for a buyer to go through a dealer, said Navigant’s DeCubellis, who said his credit union issues about 1,000 auto loans a month. “And that makes it a great growth opportunity for us,” he said.
A dealer will always ask customers if they need financing, DeCubellis said. When a buyer fills out a loan application, the information is sent directly to the credit union. If the customer isn’t already a credit union member, when they see the lower interest rate, they often join.
“Through the transaction, we’re one step closer to becoming the primary financial institution for them,” DeCubellis said. “If we can convert them into a primary customer, then everyone benefits.”
