In today’s auto lending environment, a comprehensive and high-quality portfolio protection program is more important than ever — including partnering with a provider that will pay the full loan balance instead of actual cash value (ACV).
Protecting Your Credit Union from Car Market Volatility
According to Scott Colbert, EVP, Chief Economist for Commerce Trust Co., in Q2 of 2022 there were 17,000 auto dealers in the U.S. — but there are only about 34,000 new vehicles on those dealers’ lots. That’s roughly only 2 to 2.5 new vehicles per dealer.
Employees have returned to work amidst a shortage of the auto parts necessary for the vehicles they drive to get there. New car inventory sits on hold due to a shortage of microchips and other supply chain issues. Some dealerships report their back order for new vehicles ranges from a couple of months to 5 years! This has caused used car demand to skyrocket, along with sticker prices.
According to J.D. Power, the average sales price of a new vehicle during the first six months of 2022 hit a record of $44,907 — 17.5% higher than just a year ago. Edmunds.com reported that 12.7% of borrowers who financed a new vehicle in June 2022 had monthly payments of $1,000 or more. And used cars are definitely not exempt from rising prices — the average monthly payment on a used car was $503 in the first quarter of 2022 — up from $413 for the same period in 2021, reports Experian.
Relief Is Not Yet In Sight
Analysts don’t expect auto prices to begin leveling off until late in 2023 or even into 2024. Unfortunately, people who need a car now don’t have the luxury of waiting for prices to decrease — they will pay whatever they can stretch to afford. To meet this demand lenders are offering larger and larger loans for both new and used vehicles. This desperation in the car market has forced many borrowers into disproportionately high-cost auto loans — with recent higher interest rates adding to borrowers’ monthly payment burdens.
Borrowers Aren’t the Only Ones at Risk
Future market volatility has the ability to impact a vehicle’s perceived value between now and when a member pays off their loan. Today’s larger loan balances and longer loan terms leave them at risk of being upside down, with a vehicle worth considerably less than what they still owe.
As a result, this also increases risk for credit unions in their loan portfolios as they are providing loans to their members for vehicles with a hyperinflated value. If the collateral sustains damage or loss when a borrower is uninsured or underinsured, the credit union can also find itself “upside down,” with the claims amount they receive insufficient to cover its exposure.
The Good News
The solution? When you partner in a high-quality collateral protection program with State National, you can receive Waiver of Actual Cash Value (ACV) coverage — which means State National will pay the value of the entire loan amount remaining and not just a car’s value at the time of a claim.
In “normal” times, Waiver of ACV coverage is a valuable tool for decreasing risk in a lender’s portfolio. In times like these, when lenders are already being double-squeezed by low net interest margins and increases in bad debt, it’s a vital part of a successful credit union’s risk mitigation strategy.
For more information on how this valuable solution can help your credit union, contact one of our specialists today!