The next time you're listening to the radio or local TV, pay attention to the car sales commercials. Personally, I really get a kick out of some of them. Car salesmen dressed in ridiculous costumes make bold claims such as, “No credit? No problem! Come over to XYZ auto where you can sign and ride for a nickel down!” Sound too good to be true? For those who desperately need an affordable auto loan, it often is. The fine print will likely reveal high interest rates with long repayment periods needed in order to make the payments “affordable.” For financially vulnerable households, money paid in interest could be used for building long-term wealth, paying emergency expenses or reducing high cost debt.
These high-rate, long-term auto loans are similar to payday loans or cash advance offers. While the rates and costs of these services are distasteful to many, what they provide is access to money and credit when mainstream institutions like credit unions and banks fail to act.
The Importance of Affordable Auto Lending
How important is access to a reliable car? A study by the Annie E. Casey Foundation titled “Pursuit of the Dream, Cars and Jobs in America” indicates 88% of Americans drive their cars to work, with two-thirds of new jobs located in suburban areas away from public transportation systems. If you can't get to work, how can you work? If that didn't get your attention, try these statistics:
- Low-wage workers with cars are more likely to be homeowners than those without one.
- The Federal Reserve reports those earning $30,000 or less per year paid an annual interest rate that was 56.1% higher than people earning $90,000 per year.
I've heard arguments that those without automobiles should simply use public transportation. Take a look in your own community. Could you survive on public transportation alone? My daily commute and daycare drop takes a half hour each way. Taking the bus would add an extra 80 minutes round-trip, not taking into account juggling grocery shopping, doctor's appointments and other demands. I am grateful for my car. For financially vulnerable households lucky enough to be in an area with public transportation, it may be an option, albeit not a very good one.
Credit Unions Pave the Way
The good news is there are numerous resources available for credit unions willing to tackle this challenge. In addition to the multitude of credit unions that have paved the way, Filene Research Institute, in collaboration with the National Credit Union Foundation, tested a Non-Prime Auto Lending (NPAL) program as part of Filene's Financial Empowerment Incubator. The results were astounding. During the 18-month reporting period, 10 credit unions closed 7,605 loans totaling more than $102 million. The average borrower income was $42,418 with an average credit score of 584. In addition to the member impact, the program was financially sustainable. Dave Prosser, SVP of Community Development at Freedom First Credit Union and a tester of the NPAL program, said, “[It] isn't a charity. It is a business that makes money for Freedom First – lending to people who work hard and can be trusted to repay their debt.” An implementation toolkit is available through the Foundation to help credit unions model best practices, overcome obstacles and set up a program with the highest potential to make meaningful member impact in a financially sustainable way.
Expanding Your Portfolio Makes Good Business Sense
Traditional auto lending remains a core and profitable endeavor. A June 2017 Credit Union Trends report by CUNA Mutual Group found new auto loan balances grew at a 26.5% seasonally adjusted annualized growth rate in April 2017. Credit unions have a tremendous opportunity to continue riding the wave of profitable auto lending and expand their portfolio to serve financially vulnerable populations. Expanding service to your community isn't just about non-prime lending. Filene is currently testing a Non-Citizen Lending program in our Incubator. Using alternative identification verification processes such as the Individual Tax Payer Identification Number, many credit unions in the pilot are able to offer existing auto loan products to non-citizens. Point West Credit Union updated its non-citizen lending program in 2014 and reports repayment rates equal to, or better, when compared to their total portfolio.
Don't Disguise Your Community Mission
The next time you hear one of those too good to believe, over the top, costumed individuals making a car sale pitch, take a look around your community and consider the demand for affordable and reliable automobiles. Credit unions don't need a disguise or gimmick to better serve members. They just need a commitment to find a way to say “yes” to an affordable auto loan when others say “no.” It is clear credit unions see auto lending as a core part of their portfolio. My hope is that the industry can also see auto lending to financially vulnerable populations as an equally important part of their core mission and operations.
Adam Lee is Incubator Director at Filene Research Institute. He can be contacted at 608-661-3747 or [email protected]
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