Most credit unions are willing to approve financing on used vehicles even if the debt-to-value ratio, mileage and auto loan term are elevated and the down payment is low.
Despite concerns about overextension, most credit unions are willing to approve lengthy auto loans and finance 125 percent of vehicle value on used models, a new study by Credit Union Leasing of America has found.
“It was no surprise to us that over-extension on used vehicle loans is generating significant worry for credit unions, as is overall used vehicle affordability,” Mark Chandler, Credit Union Leasing of America business development vice president, said in a statement. “[But] the results also uncovered a troubling disconnect: credit unions continue to offer car buyers a significant percentage of longer-term loans, with low down payments, on high mileage older vehicles and increased [loan-to-value ratio].”
Credit Union Leasing of America connects credit unions and dealerships seeking to offer consumer auto leases. Its polling ran April 4 through May 5 and involved 415 credit union professionals.
The study found that 64 percent of credit union personnel were worried about overextension on used vehicles for 2023. More lenders were concerned about overextension than they were about rising vehicle prices, an issue for 46 percent of credit unions.
Chandler said the question didn’t specify whether the overextension concern referred to the customer or credit union being the one spread too thin, “but our assumption is that the answer reflects concern for both.”
Forty-two percent of credit unions said they offer 72-month loans on used vehicles, while another 28 percent said they would approve terms of 84 months, the study found. More than half of 84-month lenders, 57 percent, said they’d allow seven-year loans on vehicles that were already five years old. Twenty-nine percent would extend credit on six-year-old models for the next seven years, meaning the credit union would be financing a teenage vehicle in the final year of the loan.
Credit unions also are willing to write loans on vehicles that have seen significant mileage. Forty-six percent would allow a loan on a vehicle with up to 75,000 miles, while another 14 percent would approve up to 100,000 miles. Sixteen percent had no mileage ceiling at all.
In terms of finance structure, 71 percent of credit unions would lend at least $75,000 on a used vehicle, 55 percent would loan out 125 percent of a used vehicle’s value and 68 percent would accept a down payment of 10 percent or less. Twelve percent of credit unions would allow customers to buy vehicles with no down payment at all.
“Loans with low down payments will likely be extended to the maximum and the borrower will be in negative equity for longer adding to credit union risk,” Credit Union Leasing of America said.
The average used-vehicle loan in the first quarter ran 67 months, financed $26,420 and had a 116 percent loan-to-value ratio, according to Experian.
