The Changing Landscape of Credit Union Auto Lending

If you randomly surveyed any number of people throughout the United States and asked them to name one thing a credit union offers, a large percentage would more than likely respond by saying great auto loans. Throughout the evolution of the industry, members have consistently relied on their credit union to provide competitive financing for their new and used autos apparent by the fact that auto-lending has traditionally been the strongest product for a credit union and currently account for 39% of an organization’s lending portfolio. However, over the past few years growing competition from banks, auto manufacturer financing divisions, and incentive programs have changed the landscape of auto lending and pose a formidable challenge for the consistent growth of this time-honored revenue source for credit unions. Auto lending is a dynamic and rapidly changing multi billion-dollar business that is crowded with giant lenders. Credit unions have traditionally relied on member loyalty to maintain their competitive edge and market share in the auto-lending arena. Unfortunately, the plethora of low-interest rate promotions have impacted member loyalty and effectively lured members into financing deals away from their credit unions. While data from the recent 2003 Callahan & Associates Auto Lending Report reveals credit unions now hold over $135 billion in auto loans, a 5% increase since the end of 2001, new growth was mainly generated by used auto loans. The data also reveals new auto loans have steadily declined over the past two years. The simple fact is credit unions must work harder now to maintain and build their auto lending market share. Members are looking for the “best deal” and an auto financing process that is fast and convenient. In order to meet the demands of these market trends, credit unions are turning to indirect lending programs and working with dealers to offer their loan applications right at the dealerships. In 1992 when The Golden 1 decided to enter into indirect auto lending, the competitive landscape was very different. An indirect lending program was more of a member service, since 70% of car purchases were impulse buys, mostly done on Friday evening through Sunday. While Golden 1 had an extensive branch network, they could not match the delivery channel convenience of major banks and their indirect lending relationships. Today, these online automated loan-decisioning systems not only allow credit unions to provide a convenient way for existing members to arrange for financing, they provide an efficient means for competing at the point of purchase and, in some instances, the added advantage of signing on new credit union members. Indirect lending programs have become an attractive financing tool for credit unions too in recent years. Callahan & Associates reports during the first quarter of 2003, credit unions funded $5.4 billion in indirect loans, which is 9% of total auto loans generated. Which means by implementing a point of purchase lending program, credit unions can sustain a respectable source of auto lending revenue. However, the benefits of indirect lending become even greater when credit unions come together on one automated lending platform. With the launch of Dealer Track, the banks and financial institution lending network, and RouteOne, the auto manufacturers/captives platform, both of which offer dealers the capability to quickly access their financing, credit unions must also provide dealers with the same fast turnaround ability or face losing numerous loan opportunities. In addition to the member convenience, by aggregating on one lending platform, credit unions can greatly improve the cost effectiveness and efficiency of their overall loan process. An indirect lending program such as the program developed by Credit Union Direct Lending (CUDL), the program which originated through a partnership with The Golden 1 and the California Credit Union League, provides credit unions with the technology, training, marketing, and dealer relationships necessary to run a successful indirect lending program that will produce profitable returns. The strength and influence of aggregating on one lending platform allow credit unions to raise their visibility at the dealerships and offer an attractive alternative to other financing programs. Also, credit union owned brands, such as CUDL represent the reputation and values of the industry. Another benefit of a successful indirect lending program is the opportunity for credit unions to expand their membership base and cross-sell other products and services. Through relationships with designated dealerships, credit unions can use their quick and easy auto lending process as a marketing tool to broaden their exposure to non-members in the community. While this will require additional focus to develop these members into multi-product users, it is an ideal opportunity to introduce credit cards, Credit Life/Disability, GAP Insurance, and any other services that can assist members in other financial areas. Intense competition from auto manufacturer incentive programs, other financial lending technology, and interest rates is expected to continue to have a significant impact on the future of the auto lending landscape. Dealers will continue to value processes that will save them time and ultimately speed up the loan funding process. Members will continue to be inundated with enticing auto deals. The credit union industry has responded to these competitive challenges and trends by identifying new growth opportunities and developing the strategies and technology to continue gain new business and ultimately increase market share and profitability. Services such as e-doc signatures, will allow members to process online applications securely, dealerships to receive loan funds quickly, and help build stronger relationships with credit unions. The growing momentum of credit unions aggregating on a unified lending platform, will allow credit unions to leverage their buying power at the dealerships and increase the dealership value proposition. The landscape of auto lending will continue to change and be a dynamic and complex business. Auto lending will continue to be an important product in a credit union portfolio, but how its developed, managed and maintained must be clearly defined in order to remain a profitable source of revenue. By partnering with a successful indirect lending program with a national presence, wide network of dealerships, and a marketable brand, credit unions can build and maintain their market share and solidify their image and reputation as a preferred auto-lending source and successfully maneuver through the changing auto lending landscape.