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Is Loan Growth Keeping Pace With Deposit Growth At Your Credit Union?

How residual based financing can help credit unions increase their auto loan volume.

Record-setting deposit levels since 2020

Since the start of the pandemic, credit unions have seen deposits rise at unprecedented levels. According to data from NCUA, credit union account balances have risen nearly 60% in the last five years. With loan demand lagging credit unions have had to pivot to lower yielding investments which may ultimately strain capitalization requirements.1

The pandemic created an odd combination for credit unions. On the one hand, many members found themselves with more savings since travel and other restrictions kept them from spending money on services and leisure and therefore their deposits increased.

On the other hand, with vehicle prices being at all-time highs due to shortages, some borrowers may have pulled back from the market, causing auto loan portfolios, which have traditionally helped credit unions serve their members and grow, to shrink.

State of the vehicle market

Discounts and incentives that were common in pre-pandemic times, have all but disappeared in the current market. Dealers can add $2,000 to $3,000 to the list price given the continuing high demand for vehicles2, especially as consumers continue to look for private forms of transportation in the midst of another wave of a more contagious variant of the coronavirus.

Many manufacturers are looking at ways to increase chip production domestically. Ford, for example, announced an agreement with a U.S.-based semiconductor supplier in November of 2021, to help increase their control over both supply and design of chips3.  This, however, will be a longer-term endeavor, and it will take time to see the impact on vehicle production.

Used vehicles, which were once a more affordable option for consumers who couldn’t manage the price tag of a new vehicle, have also been impacted by the chip shortage and seen unprecedented increases in value.

According to Cox Automotive, used car vehicle prices will remain high well into 2022. High prices will be driven not only by vehicle shortages, but also by high demand due to an expected record level of tax refunds this year.4

In addition to the shortages, amid rising inflation, the Federal Reserve is expected to raise rates at least four times in 20225, which will impact auto lending and increase monthly payments for most borrowers, potentially leading auto lending at credit unions to grind to a halt and causing them to continue to “drown in deposits”.

The implications for auto lending

Offering residual based financing can help financial institutions stay competitive and offer borrowers the affordability and flexibility that they need in light of rebounding demand for vehicles coupled with shortages in inventory and high prices.

Lenders should offer all affordable payment options to their borrowers. 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 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 learn more about auto lending trends and how you can position your credit union for success in 2022?

Call to action

On February 8, 2022, Auto Financial Group hosted a webinar providing an overview of residual based vehicle financing followed by a Q&A session with 1st Community FCU about how AFG’s residual based financing program has helped them increase their auto loan volume.


Watch the webinar here: https://www.autofinancialgroup.com/benefits-of-residual-based-financing-webinar/ 


1 https://www.americanbanker.com/creditunions/news/deposit-surge-puts-credit-unions-in-regulatory-bind
2 https://www.nytimes.com/2021/12/22/business/economy/car-chip-shortage-pandemic.html
3 https://www.nytimes.com/2021/11/18/business/ford-globalfoundries-chip-shortage.html
4 https://www.autofinancenews.net/allposts/risk-management/used-vehicle-values-inch-up-in-december-as-inventory-improves/
5 https://www.cnbc.com/2022/01/10/goldman-predicts-the-fed-while-hike-rates-four-times-this-year-more-than-previously-expected.html

This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
February 7, 2022

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