Auto lending remains one of the most important consumer products on a credit union’s balance sheet. It supports loan growth, strengthens member relationships, and anchors indirect lending strategies. But today’s auto finance environment looks materially different from what it did just a few years ago, prompting many leadership teams to re-evaluate long-standing assumptions.
Vehicle affordability is under pressure, loan terms continue to stretch, and residual risk has re-entered strategic discussions. For credit union executives, the issue is not whether auto lending should remain a priority, but how it should be structured to balance member value, yield, and risk.
Affordability Pressures Are Broad-Based
Affordability challenges are no longer isolated to subprime borrowers or first-time buyers. They now affect a wide range of members across income levels.
Recent data shows that more than 20% of financed new-vehicle purchases now carry monthly payments above $1,000, while nearly one in four trade-ins with negative equity involve balances greater than $10,000¹. These figures suggest a structural shift in the market rather than a temporary disruption.
At the same time, average transaction prices remain elevated. While prices have moderated from pandemic-era peaks, they remain well above pre-2020 levels, particularly for trucks and SUVs². When combined with higher interest rates, traditional loan payments are increasingly difficult for members to absorb without extending terms.
For credit union leaders, this raises important questions about sustainability. Longer terms can preserve monthly affordability, but they may also increase exposure to negative equity and weaken collateral positions early in the loan lifecycle.
Rebalancing Growth And Balance Sheet Performance
Auto lending has historically been viewed as a volume-driven product. Today, many institutions are placing greater emphasis on yield, average daily balance, and capital efficiency.
Average auto loan terms now hover around 68 months for both new and used vehicles, reflecting how the industry has adapted to rising prices and rates³. At the same time, average monthly payments have climbed to approximately $748 for new vehicles and $532 for used vehicles, reinforcing the central role affordability now plays in lending strategy⁴.
As a result, leadership teams are re-examining whether traditional amortizing loans alone can meet both member and balance sheet objectives. Alternative structures that change how principal is amortized are increasingly part of the conversation, particularly those designed to shorten effective loan duration while maintaining affordability.
Leasing Pullbacks Create Strategic Gaps
Leasing has long addressed payment sensitivity, but it has also introduced operational and risk complexity. Since the pandemic, leasing availability has declined as captives and large lenders reassessed residual exposure and capital usage.
Before 2020, leasing accounted for roughly 25% to 30% of retail new-vehicle transactions, but penetration fell significantly during the pandemic and has yet to fully recover⁵. This retrenchment has created gaps in the marketplace, particularly for borrowers who prioritize payment flexibility but still want to work with a trusted financial institution.
For credit unions, the question is not simply whether to offer leasing or other residual based financing options, but whether alternative approaches can address payment concerns without introducing full lease complexity or pushing members toward third-party providers.
Residual Risk As A Governance Consideration
Residual exposure is often cited as a barrier to nontraditional auto finance structures, and for good reason. Poorly managed residual assumptions can lead to outsized losses during market corrections.
However, not all residual based financing models require the credit union to retain residual risk directly. Some programs incorporate guaranteed future value components, where residual exposure is transferred to third parties using valuation methodologies similar to those employed in leasing.
From a leadership standpoint, the key considerations include clear ownership of residual risk, transparency around valuation assumptions, and alignment with examiner expectations. Regulatory guidance emphasizes that third-party relationships and nontraditional loan structures should be supported by appropriate due diligence, risk assessments, and board oversight⁶ ⁷.
Used Vehicle Normalization Elevates Remarketing Importance
Used vehicle values have begun to normalize after several years of volatility. After peaking in late 2021, wholesale values declined through much of 2023 and stabilized in 2024 as supply and demand rebalanced².
In this environment, remarketing performance plays a critical role in loss mitigation. Days-to-sell, channel selection, and geographic reach directly affect recovery values. Weak remarketing execution can quickly erode the benefits of higher yields or strong origination volume.
As a result, remarketing is increasingly viewed not as a back-office function, but as a strategic lever for protecting capital and managing risk.
Staying Relevant In The Dealership Finance Office
Indirect lending continues to drive a significant share of auto loan volume, but competition in the dealership finance office remains intense. Rate alone is often insufficient, particularly when payments are already stretched.
Dealers prioritize solutions that help close transactions. Credit unions that can offer payment-based flexibility while maintaining credit discipline are better positioned to remain relevant partners. Achieving this requires consistent staff training, clear guidelines on when alternative structures should be offered, and ongoing dealer education.
Strategic Questions Leaders Should Be Asking
Auto lending remains a core strength for credit unions, but the conditions supporting that success have changed. Affordability pressures, extended loan terms, and shifting vehicle values are forcing institutions to look beyond familiar structures and reconsider how risk and return are balanced.
For credit union leaders, the most important decisions are no longer tactical. They are strategic. How loans are structured, how residual exposure is managed, and how member payment needs are addressed will shape portfolio performance and member relationships for years to come.
Institutions that approach auto lending with a willingness to reassess assumptions, evaluate alternative structures, and align governance with market realities will be better positioned to remain competitive while continuing to serve members responsibly.
Are you ready to rethink your auto lending strategy?
Join Auto Financial Group for a live webinar on Feb. 24 at 1 p.m. CT / 2 p.m. ET. Understanding Residual Based Financing: From Basics to Benefits will explore how residual-based financing works and show you how this type of financing can help your credit union to address affordability, risk, and portfolio performance. Click here to register.
Auto Financial Group (AFG), a Houston-based company, provides an online, residual based, walk-away vehicle financing product called AFG Balloon Lending, as well as vehicle leasing and vehicle remarketing to financial institutions across the United States. For more information about AFG call toll free at (877) 354-4234 or visit www.autofinancialgroup.com.
Tim Kelly is president of Auto Financial Group. He has more than 25 years’ experience delivering solutions to financial institutions. Contact him at tkelly@autofinancialgroup.com.
