The surge in auto sales that began near the tail end of last year continues to expand and invigorate the U.S. economy. January's auto sales numbers increased 15 percent from a year ago, according to The Wall Street Journal, and much of the growth is in expensive trucks and SUVs that offer high margins for car manufactures. While the relationship between increased American auto sales and low gas prices is well-documented, there is another layer to this growth. Many Americans need new car loans to afford these vehicles, which may put off borrowers who are concerned about loan defaults. In fact, these loans are a relatively safe bet for lenders, as less-qualified individuals prioritize their car payment over other bills.
Different loans, different default rates
Data for the month of December collected by Experian illuminated an interesting trend in loan repayment. Despite rising default rates for bank cards, first mortgages and second mortgages, auto loan defaults actually decreased to 1.02 percent month to month a decline of three basis points.
It's not clear why defaults are down in the auto sector, but it's likely rooted in many people's need for a car that can transport them to work. This encourages them to maintain their car payments even when it means foregoing other expenses. This could also be viewed as a risk, because it indicates an extremely tenuous financial situation for these people. While traditional lenders may put these borrowers in an unwinnable situation, credit unions have the ability to both benefit from the demand for auto loans and offer favorable terms to borrowers that will encourage financial growth.
Education and intelligent lending
The more community-focused membership structure of credit unions makes it feasible to evaluate each individual borrower completely, which in turn makes it possible to lend to less-qualified borrowers while minimizing risk. A holistic approach to a persona's financial evaluation before loan approval makes it possible for credit unions to accurately assess an individual's ability to repay.
This sort of care will likely become a necessary part of the approval process, as the type of take-all-comers auto lending that sprang up in the past few years starts to attract regulatory scrutiny. The New York Times reported new government regulations may clamp down on title lending and other practices that many consider predatory. Credit unions provide an alternative to these lenders and are likely to benefit from increased regulation in the space. People will continue to prioritize auto loans, and credit unions are able to provide sustainable options that are beneficial to everyone involved.