The market for vehicle loans continues to challenge lenders, maintains the 2004-2005 Credit Union Environmental Scan Report, published by the Credit Union National Association (CUNA).

What's influencing the trend: buyers who expect generous incentives before signing a deal; and a flattened import market share after a steady seven-year rise, a result of the weaker dollar and consumers' preference for sport utility vehicles.

The E-Scan says a significant feature of new-vehicle lending is the move to longer loan terms, now at 96 months among some lenders. "An eight-year term allows financial institutions to compete with leasing and allows consumers to purchase vehicles they otherwise couldn't afford," according to the report.

Other trends in CUNA's planning resource:

* Smaller down payments and longer terms result in smaller monthly payments but higher overall debt. The average monthly new-car payment dropped from $466 to $447 during 2003, while the average car loan rose from $23,656 to $23,801.

* Long-term loans probably are here to stay. The average new-vehicle price tops $27,000, making it difficult for many people to afford a new car with a conventional four-year loan.

* Consumers use gap insurance to cover the difference between what they owe on their car if it's totaled and whal the insurance company says it's worth, or the actual cash value.

* A no-payment auto loan features no payments for six months. Although these plans have received a lukewarm reception, local dealers have used them as an incentive. Under the deferred payment plan, interest accumulates during the grace period and the first payment is applied to interest.

* Balloon loans combine a regular auto loan with the features of a lease. Monthly payments are lower, the down payment is waived, and mileage is unlimited. At the end of the loan term, the buyer can sell the car and pay the loan balance, trade in the car and pay the loan balance, or keep the car and refinance the debt.

Three auto loan strategies for credit union lenders to keep in mind, according to the E-Scan:

1. Expect more limitations to accompany dealer incentive offerings as interest rates rise.

2. Use longer-term loans to compete with leasing programs.

3. Recognize that lease look-alike programs and no-down-payment programs will appeal to a certain portion of borrowers.

Order E-Scan online (advice.cuna.org), by phone (800-356-8010, press 3), or by fax (608-231-1869). It's available as a print report (Stock No. 23118-CUM), PowerPoint presentation (Stock No. 23199-CUM), or video (Stock No. 30005-CUM).

Copyright Credit Union National Association, Inc. Sep 2004
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