NAFCU Services Blog

Jan 10, 2024

Seizing the indirect auto lending opportunity

Allison Huber, Head of Content Marketing at Upstart

There are new reasons to be optimistic that the auto loan market is about to reverse gears after years of low sales through the pandemic. According to an interview with Curt Long, NAFCU’s Chief Economist and VP of Research*, several recent economic reports show “real deflationary trends,” especially in the area of auto production, which will boost the number of cars available for consumers to buy. 

One promising trend is falling car prices. Despite the Big Three automakers striking in September–and even though it was the longest US auto in 25 years–auto prices did not increase.1 Indeed, when the strike ended in October, new auto prices were down an average of 1 percent from the previous month2 and used auto prices decreased 1.6% from October in the first 15 days of November.3

Predictions for a Soft Landing

At its November 1st meeting, the Federal Reserve held interest rates steady and upgraded its assessment of the economy citing a growing labor market and slowing inflation. While the Fed’s battle against inflation may not be over, it has held rates steady since its last hike in July to 5.5 percent.4 An October jobs report offered more support for Long’s prediction of a soft landing. The report showed job gains in October, and even though below forecast, gave the Fed another reason to stop raising rates. One economist said these just-right job gains (not too weak, not too strong) affirmed “a cooldown, rather than collapse.”5

“I’ve had a more optimistic view that we can get a soft landing and avoid a recession, which seems to be the prevailing view recently,” Long said. One supporting fact he pointed out was that the unemployment rate has remained below 4 percent meaning there are many people working and still getting relatively good wage growth. The nation’s unemployment rate as of October 2023 was 3.9 percent.6

“Despite economic problems and risks, the labor market is strong now and that’s going to buoy the economy long enough where we start to see disinflation,” said Long, adding that positive wages result in more spending power on the part of workers and consumers. Based on current conditions, Long said his message to NAFCU* members has been to stop being pessimistic because a recession is not inevitable.

Long said that when recessionary concerns were higher, he understood credit unions being conservative in auto lending. However, the narrative has shifted, and there are continued signs that inflation is cooling.

Good News for auto based on the Consumer Price Index

The Department of Labor’s October 2023 consumer price index (CPI) showed that inflation cooled more than expected, providing solace to American's who had dealt with high prices over the past two years.7 In the past three years, car prices surged and then continued to linger due to the ongoing impact of the pandemic when supply-chain issues slowed new car production which, in turn, fueled demand for used cars.

In the U.S., the average price of a new vehicle was up 4.2 percent year-over-year in January 2023. In the used car market, average prices tracked around 30 percent above pre-pandemic levels.8 Economists expected car pricing to cool, with one Kelley Blue Book researcher stating, “New-vehicle price inflation has all but disappeared in 2023.”9

Long said that autos had been a big source of inflation. However, now analysts predict it’s “full speed ahead in the runup to 2024” with the auto sector maintaining momentum in 2023 that can push sales. “Although there is still a deficit in the number of autos produced in the last couple of years, production is improving,” said Long. “That’s going to take the air out of car prices, both on the new and used side.”

Some analysts are even predicting an imminent price war by the end of 2023 – a recent UBS report estimated that global car production will exceed sales by 6 percent this year, leaving an excess of 5 million cars and forcing price cuts.10 “Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result. The price war has already started unfolding in the EV space, and we expect it to spread into the combustion engine segment [during the second half of 2023],” UBS said in a note to clients.

While consumer credit data from the Federal Reserve shows overall lending has declined, there are bright spots. Long said that consumer credit rebounded in September despite the general downward trend. He added that non-revolving credit increased by 1.9%, which represents a significant jump from the 9.8% drop in August. Specifically, vehicle loans continue to advance.11

Seizing the Indirect Opportunity

With inflation potentially subsiding, credit unions are poised to take advantage of pent-up consumer demand for vehicles, which has driven up demand for indirect auto financing. In fact, Cox Automotive updated its full year forecast to 15 million units, up from 13.9 million in 2022.12

As consumers seek indirect auto financing options, Upstart offers credit unions the opportunity to tap into Upstart’s dealer network without adding additional resources. Upstart Auto Retail is one of the fastest growing digital retail platforms for dealerships and has expanded nationwide into over 600 rooftops with 10 certified OEM partners, including Toyota, Volkswagen, and Honda. As analysts point to a potential price war on the horizon for indirect auto lending, leveraging Upstart’s AI model gives credit unions an advantage in growing their auto portfolios by accessing Upstart’s large dealer network. Additionally, Upstart enables credit unions to increase their conversion rates by automatically connecting to every loan submitted through Upstart. Finally, credit unions are empowered to control their return target and access profitable loans within their specific credit parameters and risk appetites – in fact, Upstart is currently seeing credit union eligible loans with an average net return after credit losses and fees of 6.0 percent in indirect auto lending.13 

Capturing the Auto Lending Opportunity

Given a positive outlook ahead in terms of auto production and deflation, credit unions are wise to consider their position in the indirect auto lending market. As Long said, “My expectation is that the economy is going to look pretty good one year from now.” 

Upstart’s auto retail lending solution enables credit unions to seize the opportunity generated by auto deflation and grow their indirect auto loan portfolio by more accurately assessing risk, resulting in higher approvals and lower losses. 

13.    Average returns are taken during the time period 7/1/23 to 7/31/23
*NAFCU is now America’s Credit Unions.

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