The coronavirus pandemic has had a great impact on many sectors of the economy, vehicle sales have been no exception. Sales dropped by 24% in the first half of 2020, according to Cox Automotive.
But since the economy began to reopen in the summer, we have seen vehicle sales recover at a pace that was not quite expected, reaching almost pre-pandemic levels in July, according to Experian: “In both June and July, there were approximately 1.2 million new vehicle registrations; only about 120,000 off February levels — and used vehicle registrations actually surpassed the February mark in both June and July by surpassing 3.7 million vehicles each month.”
One possible explanation for the fast recovery lies in the attractive cash incentives offered by automakers who were trying to bring wary consumers back into the market. A low rate environment has likely also been favorable as it helped keep monthly payments manageable.
The pandemic also seems to have stimulated consumer demand in unexpected ways. One reason many consumers who may have previously not owned a car are now looking for one is the fear of using mass transit in urban areas to commute to work, as well as the concern over air travel which is leading more people to take road trips for vacations instead, as noted by The Wall Street Journal.
Another effect of the pandemic on vehicle sales is that many consumers are leaning toward vehicles with greater cargo capacity, such as SUVs and pick-up trucks. Gas prices have remained low and these vehicles have become far more efficient than they were even a decade ago.
These versatile vehicles have been particularly attractive during a time when people spend more time in their homes than ever and are looking to be able to accomplish home improvement projects to make their home office or leisure space more comfortable.
An unexpected hurdle for the industry, however, has been low inventory due to the factory shutdowns brought on by the pandemic in March and April. Automakers have been boosting production to meet demand but supply has not quite kept pace, leading to rising prices for new and used vehicles.
A recent TrueCar survey revealed that while consumer confidence seems to be returning, affordability remains a great concern: “Shopper concerns over vehicle affordability stood out, however, and we expect that trend to continue while inventory remains limited.”
Vehicle Financing Trends
According to Callahan & Associates, credit unions are well positioned to weather the COVID crisis and serve their members in a time where they may be experiencing significant disruption to their finances: “Credit union balance sheets grew at near-record levels in many categories.”
Experian, however, reports a loss of market share in vehicle financing for credit unions down to 18.7% in Q2 2020 from 19.8% in Q2 2019. Captive lenders, meanwhile, have seen an increase in market share from 28.6% up to 31.1% in the same time period. Perhaps in this time of financial turmoil, your credit union needs to support members with more flexible yet still affordable vehicle financing options.
Experian, additionally, cautioned against the trend of extending loan terms, saying in a recent blog post: “Consumers are taking advantage of new car incentives, low interest rates and longer-term loans in order to ensure that their vehicle purchase is manageable. But, with the long-term effects of COVID-19 still unknown, it’s important for lenders to ensure they’re helping consumers make the best possible decisions.”
In times of uncertainty, residual based vehicle financing programs such as walk-away balloon loans and leases, can provide much needed flexibility to members. They offer a more affordable monthly payment with a shorter term. Additionally, the guaranteed future value shields borrowers from the risk of negative equity, more closely matches trade-in cycles, and avoids tying them to an auto loan for almost a decade.
Residual-based financing can also be used to lower payments for vehicle loans your credit union may be looking to refinance. The lower payment can help keep the member in their vehicle in the case of a delinquency or possible repossession by lowering monthly payments. Residual based financing could also help members that are in severe negative equity situations.
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