One of the greatest things about my job here at SWBC, and as a former lending executive, is that I get to speak with financial institution leaders, more specifically, credit union lending executives, on a regular basis. In recent weeks, unfortunately, a lot of the conversations I've been having have not been as upbeat as we would typically like. And, that's primarily because of the effects of the COVID-19 outbreak on many parts of our organizations, but more specifically, significantly declining levels of auto loan originations and loan growth in the credit union space. None of us truly know the long-term impact of COVID-19 on a macro-economic scale, but in today’s blog post, I’ll share a few specific ways that we’ve seen COVID-19 impact the auto lending industry.
I’ve pondered a few questions when it comes to the impact of COVID-19 on the auto industry:
How do we get back to the levels of originations that we'd like to see that will allow us to hit our goals?
How do we separate ourselves from the rest of the lenders that are in our various footprints?
How can we utilize differentiation to attract both our existing account holders and/or new account holders during these challenging times?
In my next blog post, I will share specific strategies that you can employ in order to supplement auto loan originations and increase volume, but today, I'd like to talk about the impact COVID-19 has had on the auto industry, and sales specifically. Without a doubt, 2019 was another banner year. In fact, for the fifth consecutive year, the auto industry saw over 17 million vehicles sold. That level of performance was primarily the result of readily available credit, historically low unemployment numbers, and a healthy consumer sentiment.
Levels Unseen Since the Great Recession
While 2020 was not expected to be a record year, industry analysts actually forecasted sales to be near 17 million units, once again. The seasonally adjusted annual rate of sales in both January and February seemed to indicate those forecasts would be spot on. Although there was a slight dip in February, they still reached a seasonally adjusted rate of sales of 16.7 million vehicles. Unfortunately, with the widespread outbreak of COVID-19 in March of this year, vehicle sales effectively dropped off a cliff, reaching their worst level, based on a seasonally adjusted rate since March 2010, during the Great Recession. The annual vehicle sales rate dropped by five million vehicles from 16.8 million all the way down to 11.8 million. To put that into perspective, in March 2010, the seasonally adjusted annual rate of sales dropped all the way to 11.7 million, which is the worst in 10 years.
Now that the U.S. has been in the throes of the pandemic for more than six months, we’ve watched the economy, unemployment, and consumer sentiment yoyo up and down. According to Cox Automotive, at the start of August, retail sales were down 5% year-over-year for used vehicles and 19% for new vehicles. While sales are down year-over-year, inventory is also significantly below pre-pandemic and 2019 levels. This lack of inventory has pushed the average price of used vehicles up. In fact, retail prices for used vehicles are up 6.1% since 2019. Given the low consumer sentiment and the high average vehicle price, we could deduce a continued struggling auto loan market, but the fact is, no one has a crystal ball, and despite low consumer sentiment, leading indicators are quite mixed. For example, Autotrader and Kelly Blue Book have both seen increased leads thus far in August, up 40%, and 11% year-over-year, respectively.
Wavering Consumer Confidence
A value of a hundred on this index indicates consumers have a high level of confidence in the stability of the economy. The consumer confidence index jumped from 126.5 to 131.6 in January 2020 from December 2019. By February 2020 (in the early days of the COVID-19 outbreak), the consumer confidence index dropped 11% to 118. Then in March 2020, when the outbreak, quarantine orders, and social distancing guidelines became more widespread, consumer confidence dropped an additional 26% all the way down to 86.9, indicating that consumer confidence was quite weak historically. Currently, as of August 11, consumer sentiment is down 23.6% since February and sits at 86.62. So how has the industry reacted to the significantly declining levels of vehicle sales? Well, the Cabot Finance Company went back to their typical bag of tricks and brought back 0% financing offers.
According to Cox Automotive, thus far in August, the share of 0% APR loans has decreased to 10.3%, all the way down from 21.3% in April. To add to the ‘captivating’ low rate offer, some captives are combining not only 0% financing, but also deferred payments. In some cases, 90 or 120 days. Ford Motor Credit even developed a program that gave borrowers up to six months of deferred payments. This program deferred their payment for the first 90 days, then made up to three payments on the borrower's behalf for a total of 180 days prior to the first due payment. So the question really becomes: without having the luxury of an auto manufacturer subsidizing 0% financing, how do financial institutions compete?
Stay tuned for my next blog post where I will outline a number of ways that financial institutions can capture new borrowers or recapture additional loan origination opportunities form their existing borrowers.