Helping credit union members navigate the vehicle-affordability crisis

Four reasons vehicle affordability is at an all-time low and how residual-based financing can offer a solution with lower monthly payments


Many borrowers are finding it difficult to find a vehicle they can afford. According to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index, which tracks the number of weeks of income the average earner needs to buy the average new vehicle, it set a record at the end of 2021: 43.2 weeks.

There are four main factors that are contributing to the current affordability crisis:

  1. Shortages induced by supply chain disruptions

    At the beginning of the pandemic, many car manufacturers canceled orders for microchips. They were expecting lower demand as a result of the disruptions caused by worldwide lockdowns. The sale of electronic devices boomed during this time, which meant car manufacturers weren’t able to get enough chips to resume normal production when demand rebounded. Throughout 2021, new vehicle inventory remained low and prices for used cars kept rising.

    Unfortunately, the situation is not likely to improve in the near term. The CEO of one of the largest microchip suppliers in the world, Japan’s Rohm Co., which counts Toyota, Ford and Honda among its clients, recently told reporters that even with all facilities running at full capacity, they will likely not be able to clear the backlog of orders until next year.
  2. Manufacturer incentives have vanished

    Dealer lots are empty due to the inventory shortage. According to J.D. Power, new vehicle sales were down almost 30% in March compared to the same period last year. With demand soaring, manufacturers and dealers see no need to offer any incentives to buyers. According to J.D Power, incentive spend per vehicle was at 2.3% in March 2022 compared to 7.7% in March of 2021.

    In fact, according to Edmunds, more than 80% of buyers paid above sticker prices in January of this year, compared to less than 1% of buyers in 2020.
  3. Transaction prices continue to rise

    Even with low inventory of new vehicles on sale, transaction prices continue to rise and remain at record levels. According to Kelley Blue Book, the average transaction prices increased to $47,148 in May 2022, up 1% month over month and 13.5% from May of 2021. This is the second-highest price behind only December of 2021.
  4. Uncertain economic environment

    Inflation is starting to take its toll on the budget of many average Americans. In May of 2022, the Consumer Price Index rose to 8.6% from the previous year, the highest level since 1981.Average gas prices have hit a record high, surpassing $5/gallon for the first time, which will likely cause many consumers to reconsider their monthly budget and what sort of vehicle payment they may be able to afford.

    With inflation rising to unprecedented levels, the Federal Reserve announced in June 2022 the largest rate increase since 1994. It raised interest rates by three quarters of a percentage point. While the move is designed to curb inflation, it will make borrowing more expensive and potentially put some forms of vehicle financing beyond the average consumer’s reach.

The opportunity for credit unions

According to Experian’s State of the Automotive Finance Market report, credit unions amassed 22.06% of the total automotive finance market during the first quarter of 2022. That’s up from 18.55% a year earlier.

“With low inventory and high consumer demand, we’re not seeing nearly as many incentives on the market. This has resulted in an opportunity for credit unions to step in and gain market share, as they often offer the lowest interest rates,” Experian senior director of automotive financial solutions Melinda Zabritski said in a news release.

Borrowers are clearly looking to credit unions for affordable financing in the current environment of economic uncertainty. Credit unions should take this opportunity to evaluate and offer the most affordable payment options to their members. With residual-based financing, credit unions can provide a low monthly payment alternative for their members while earning higher yields than with a conventional loan.

Auto Financial Group’s Residual-Based Financing programs (walk-away balloon lending and leasing) can help navigate the current challenges in auto lending. With lease and balloon loan programs on new vehicles and vehicles up to five years old, shorter lease/loan terms and, lower monthly payments compared to the conventional long-term loans, this is a consumer win.

Would you like to hear from other credit unions that are offering this type of financing?

On May 4, 2022, Auto Financial Group hosted a Q&A session with four partner credit unions about how AFG’s residual based financing program has helped them increase loan yield while offering lower monthly payments. 

View the webinar recording here.



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