Previously-Owned Lending Strategies

HAUPPAUGE, N.Y-The best thing credit unions can do this spring to boost auto lending is to focus on-and get creative with-used car loans.

That's the consensus among auto lending experts and credit unions who concede that banks and captive finance deals are grabbing much of the market share for new car loans. In a number of areas of the country, one source reported, CU indirect loan volume is down 50% from this same time last year.

Instead, suggest analysts, the winnable battle is with used cars because credit unions' used car rates compete favorably with banks on shorter terms, and often beat them on terms of more than two years. And for older car models and buyers with weaker credit, CUs win on average by a percentage point or two.

When used rates are fairly equal, GrooveCar President David Jacobson believes credit unions must get creative with term, loan-to-value, and loan type, such as a balloon. "Credit unions typically offer higher loan-to-value than banks, especially to their existing members. That's one area where they have an advantage and can work with members on a case-by-case basis. Offering longer-term loans on older cars separates them from banks, as well. Many credit unions will go out 84 months on a five-year-old car. We see banks go out 84, but usually on a car not more than two years old."

But Jacobson said some credit unions are also putting their used rates head-to-head with banks on shorter terms, such as Nassau Educators FCU in Westbury, N.Y. The $1.2-billion CU recently cut its auto rates one percentage point across the board, bringing its two-year used car rate at press time to 2.99% APR for the best paper on models as old as seven years.

"We have to remain competitive with auto lending and capturing the new car market is challenging," offered NEFCU senior vice president John Beneri, who said the credit union is considering extending the term on its lowest used rate, which is also the same as its new car rate. "We have not made that decision yet."

NEFCU risk prices loans in its $92-million auto loan portfolio and buys all the way down to E paper on credit scores as low as 530, charging 10.99% for two years. The credit union currently goes out four years on a 2005 vehicle and charges 3.24% for the best paper. Used cars make up 53% of the CU's car loan business.

A 2% cost of funds should help NEFCU keep rates where they are, and the credit union does not foresee going lower than its current pricing, even though Beneri expects the used car market will heat up this summer.

That competition could come from more credit unions going after used business with recapture programs, according to the Elgin, Ill.-based Lending Solutions Inc. (LSI), which reported that its clients' outbound used car loan efforts have increased 100% this year, with a great deal of success. "Among our clients indirect volume is down 50% in January and February of 2010, compared with the same period last year. To keep their loan goals up, they are not waiting for members to walk in the door," LSI Executvie Vice President Dave Brooke explained.

Cash for Clunkers is driving recapture opportunities, pointed out LSI Senior Vice President Jeff Frantz, who pegged many Cash for Clunker rates in the 5% range or a little higher. "These Cash for Clunker buyers did not go into a dealership to get a great rate. They went in to get the $4,000. Credit unions can beat those rates."

If the credit union handles outbound calling internally for a recapture program, Brooke advised that they take a consultative sales approach, which has been working well for LSI. "It's about talking to their members. Maybe you find that with one member you need to extend the term to lower the payment. With another, it could be all about rate. But you also need a couple extra arrows in your quiver to lock in the business. We had one credit union give away a $100 gift card when members closed on the financing. You have to be creative and get members' attention."

Whatever the credit union chooses to do within the used car space, they need to get moving, because even the dealers are becoming more aggressive with used cars, according to Mary Conrady, SVP-consumer lending at the $4.2-billion CEFCU in Peoria, Ill. "Toyota Financing is pressuring Toyota dealers to do 65% of all their business through them. So that's getting into the used car business."