Credit Unions Getting Mileage from Creative Auto Loan Strategies

JACKSONVILLE, Ark. – Auto loans still comprise more than a third of credit unions’ loan portfolios, but with competition for members’ auto loan business intensifying, CUs are fast realizing they can get more mileage from their auto loan products by using a little ingenuity. Last November, Jacksonville, Arkansas-based Arkansas FCU added 96-month new auto financing to its auto loan mix. In just the first two months the financing option was available, the CU did 19 loans for that term worth $531,606. Its total loan portfolio is $115 million. The objective of the loan offer, said the credit union, is to give members an alternative to leasing an auto while minimizing their monthly car payments. In addition to 96-month financing, the $364 million AFCU also offers members 24, 36, 48, 60, 72, and 84 month financing. Craig Savell, SVP of operations for the $366.9 million credit union emphasized the eight-year loan “is not a temporary promotion, but a permanent loan product we plan to offer as long as our members need to finance cars over a long period of time.” He explained there is no minimum dollar threshold for using the financing option, and he added that the 96-month financing term “allows members the opportunity to buy better cars that require less maintenance and last longer because the loan type allows them to reduce their payment so they can afford more car.” According to the credit union, the automobile manufacturers’ captive finance companies such as GMAC, Ford Motor Credit, and Chrysler Credit, only started offering 72-month auto financing in 2003. But Arkansas FCU was way ahead of them – it’s been offering 72-month auto loans for the past 13 years ago. Six years ago it started offering 84-month financing, and the credit union said that term loan is the largest dollar amount of new car financing in the credit union’s loan portfolio. The 58,000-member credit union said it has more dollars outstanding in seven-year auto loans than in any other loan category in the credit union, and that group of loans also has fewer delinquencies than five year auto loans. “That shows us just how popular that loan product is,” said Savell. First Community CU, St. Louis, Mo. tried a different creative tactic to increase refinanced auto loans. The $983 million, 126,000 member credit union gave members and non-members “100 Reasons to Refinance” their auto loan from another lender. At closing, the member received $100 cash back. The promotion was advertised on the radio and in newspapers, but the credit union said the main contributing factor to the promotion’s success was its employees who were rewarded for their initiative. Staff members were encouraged to mention the promotion to members when they spoke in person and on the phone, while assisting them with other needs. Employees in return, earned dress down days for meeting weekly goals and a catered lunch was awarded to the entire lending department and Member Service Center. Top sellers for each month also earned “generous” cash prizes. By the time the two-month promotion wrapped up, the credit union had taken in 1,119 applications worth $6.2 million in refinanced auto loans. Newport News, Va.’s 1st Advantage CU decided the best way to compete with manufacturers’ 0% financing offers was to offer them itself. “We were running in to brick walls with our members with the manufacturers’ 0% offers,” says VP of Lending Darlene Jackson, because the manufacturers’ offers were so enticing and seemed like such good deals. By offering a 0% financing promotion of its own, 1st Advantage members were able to not only get a great financing deal from the CU, but also put some additional money in their pockets by accepting manufacturers’ rebates. According to the terms of the promotion, members could finance new or untitled previous-year vehicles at 0% for the first six months on loans of $15,000 or more. To qualify, members’ credit scores had to be A or B, but even those members with C credit scores could qualify if they had a good relationship with 1st Advantage, such as a direct deposit account, existing credit union loan, or if they had been a member for several years. The credit union also does risk-based processing which allowed the CU to work with them. The $300 million credit union ran the promotion in the second and third quarters 2003. Jackson said the dealers didn’t consider the CU’s promotion “too much of a threat” to their own because “they were doing a huge business by themselves and we were the only ones in this area running our own 0% offer.” By the time the promotion wrapped up in 2003, 1st Advantage had generated about $2.5 million in auto loans. The average loan was between $23,000 and $25,000. Jackson said 1st Advantage is considering running the promotion again during the third and fourth quarters of this year. The credit union wants to beef up its indirect lending program, so by running the promotion at this time of year when dealers are interested in moving cars off their lots to make way for 2005 inventory, Jackson said “this is a way to show our support for the dealerships.” Speaking of dealer relations, an increasing number of credit unions are finding the solution to increasing the size of their auto loan portfolio is through indirect lending, but there’s room for creativity even when CU use this loan strategy. Trane FCU, LaCrosse, Wis. rewards dealers that send the $374.6 million credit union higher quality loans. The credit union instituted a Preferred Dealer program to reward those dealers that send the CUs good loans – the dealers in the program receive higher payments (2% compared to the regular commission rate of 1%) and receive more business from the credit union. To guarantee dealers don’t try to slip in poor quality loans, dealers in the program have to buy back poor quality loans that are approved. Trane FCU says 80% of the CU’s indirect loans are approved and 90% are funded. -