Viable Balloon Vehicle Loan Product One Solution to Dealers' Leasing, Loan Products

POTTSTOWN, Pa. – Credit unions tried their hand at auto leasing and most of them had to eventually concede it wasn’t a suitable product for them. But CUs have other weapons in their arsenal to compete with manufacturers’ leasing offers. “Most credit unions, because of their size and pricing structure, couldn’t compete with direct leasing companies,” said Thomas McKiernan, president/CEO, Membership Marketing. The company’s research shows credit unions lost new vehicle market share in the mid-to-late 1990s when auto manufacturers started to aggressively push leasing. “Auto leasing didn’t produce the results credit unions hoped it would for them. But balloon loan financing can help credit unions offer members a competitive low-monthly payment product,” he said. Membership Marketing’s Member Auto Payment SaverT insured vehicle balloon loan product functions like a lease and supports the acceptability of the insured vehicle balloon loan concept among credit unions, said McKiernan. There are currently 350 credit union using MAPS. He explained that as a result of the growth in popularity of balloon note financing in the mid-to-late 1990, consumers bought a lot of new cars. This resulted in a glut of used cars sitting on dealers’ lots, so cars that came off lease contracts weren’t holding their value. Membership Marketing has offered the MAPS product since 1996, but the company recently updated the product in response to the significant downward turn in the value of used vehicles over the past three or four years and other companies offering similar balloon loan products. MMSS has been tracking vehicle financing preferences of credit union members since 1985, and recent information obtained through the company’s National Member Survey Database shows while “cash” as the preferred method of financing has remained relatively unchanged, “low-payment product” financing has increased. Lease financing has also flattened out since 2000, but balloon loans have more than doubled as a financing source. “For credit unions to grow, or at minimum sustain vehicle loan activity, they need to offer a low-monthly vehicle loan payment product,” said McKiernan. “The demand for a low-monthly vehicle loan payment option will continue to grow to meet the needs of members who either cannot or choose not to use conventional vehicle financing based on the increasing cost of new and used vehicles. MMSS’ insured vehicle balloon loan product guarantees the credit union retains the residual value of the vehicle and controls and processes the entire loan, but it doesn’t have to take personal responsibility for the loan.” McKiernan added that, “We reached a point about seven months ago where we felt the credit union industry had to have a low monthly interest product to grow their auto loans, a product that had a long term availability and be positioned for financial stability. The last thing we want to see is our credit union clients get up to speed with a product and then have it go away With the growing competitive nature for auto loans on the Internet, credit unions need to have an auto loan product in place that has longevity.” MMSS estimates that approximately 4,000 credit unions currently offer leasing or balloon note financing. This means approximately 60% of credit unions only offer conventional financing, and it is that segment of the vehicle financing market that’s declining, said McKiernan. With MMSS’ updated vehicle balloon loan, the projected residual value of the vehicle is calculated when the loan is written, and the payment schedule structure is based on the difference between what the member is borrowing and the projected value. The credit union determines the loan rate. In addition, says McKiernan, unlike leasing, the MAPS product fully discloses all information up front, “so members don’t experience the hidden cost of leasing.” The MAPS product doesn’t have an early loan termination penalty either. At any time during the loan, the member can pay the loan balance in full, sell the vehicle, or trade the vehicle without paying any penalty. If the member chooses to keep the loan for the full term, they have five options: pay the loan balance and keep the vehicle; sell the vehicle and pay the loan balance; trade the vehicle, pay the loan balance; refinance the loan balance through the credit union as a used car loan; or return the vehicle and the loan balance is covered by residual value insurance. This summer, MMSS plans to introduce an Internet solution for MAPS that will allow loan staff to access the MAPS Reporting Software to quote or record loans. The service, says the company, will eliminate the need for the credit union to update the residual value data bimonthly and perform the month-end closing process. “Most consumers who lease vehicles aren’t aware of the hidden cost of leasing and the excess wear and tear clauses in their contracts,” said McKiernan. “They don’t walk away free and clear after their lease contract expires. Excess wear and tear clauses almost always require the client bring the vehicle back in showroom condition. The clauses are typically two or three-page documents that most consumers don’t read, then they get socked with costs at the end of the lease contract.” In comparison, he said, with MAPS “there are no backend surprises for the member.” “Leasing is a popular product for consumers when the price tag on new vehicles are going up and dealers tend to push the low monthly payments, but that’s only a distraction for the real price of the product,” said McKiernan. He continued that, “The F&I people at dealerships are very good at what they do, they make the leasing aspect very attractive. Unfortunately the consumer doesn’t find out the negative part of leasing until their contract expires.” With the MAPS product, the member actually owns the vehicle and there are no hidden clauses, he said. [email protected]