COLORADO SPRINGS, Colo.-When auto loan rates eventually tick up, and analysts agree a rising rate environment is coming, credit unions will be in a better position to battle for new car loans.

They will be better off for several reasons, experts say, and No. 1 is that lenders will move away from the ultra-low rates that have created some of the fiercest competition in recent memory. It will also separate, in consumers' minds, FI and captive financing, which will benefit credit unions in going head-to-head with banks.

Higher rates, too, mean captives will have a more difficult time buying the rate down to the consumer eye-popping 0% APRs, with rebates from manufacturers coming back into fashion and making it easier for credit unions to tell members to take the cash and then come to the CU for financing.

But it's not all favorable winds ahead, as all lenders need to be watchful of extending terms as consumers, many still reeling from the recession, look to keep their monthly payments down, analysts told Credit Union Journal. CUs must also be ready for increased competition from banks in the used car arena (see related stories). There is concern, as well, among experts, that rising rates will make it tougher for credit unions to do the same amount of refinancing they have enjoyed in recent years. They also expect leasing, which has already been increasing, to pick up at a faster pace.

'Sheer Desperation'

"With rising rates credit unions will be in a better position than we are today," said Bill Vogeney, EVP/CLO at $3.8-billion Ent FCU. "We face the greatest amount of competition when rates are low. Right now you see a lot of crazy-low rates, which are from sheer desperation. People are giving money away, many in an effort to jump start their portfolios. A lot of shops, as we know, had turned off a significant amount of their auto lending during the recession, so we are seeing this shock-and-awe approach to new car lending."

Vogeney, chairman of the CUNA Lending Council, added that if short-term rates rise it will be because the Fed is easing off its monetary policy due to an improving economy. "That will certainly mean auto sales are doing better and when that happens manufacturers engage in much less 0% financing."

New car sales nationwide have already picked up, reaching about 16 million units in 2012, and along with it CU loan portfolios. According to Callahan and Associates numbers through June, CU new auto loan balances are up 11.2% over the past year. Credit union used auto lending also remains strong, the company reported.

'No Line Right Now'

But it is taking super-low rates to get the business today, reminds David Jacobson, president of GrooveCar, Hauppauge, N.Y., who said the pressure is coming from automakers that have way too easy a time now buying the rate down to 0%. As rates tick up, Jacobson said manufacturers will ease back on 0% and .99% and limit the rock-bottom rates to fewer models. The big advantage for CUs is that higher rates will create a dividing line in the minds of consumers between financial institutions and automaker deals.

"There is no line right now. Consumers see no difference between captive financing and loans from credit unions and banks. It's all a big mishmash," said Jacobson. "Everyone is fighting for the 1.49% business. As rates rise, the lowball captive deals will separate from those of banks and credit unions, but they won't be on as many models and will leave a lot of cars up for grabs. This really puts credit unions head-to-head with banks, which is what they want. And when credit unions go head-to-head with banks they often win, because they usually have lower rates. Rising rates, for credit unions, gets a big heavyweight (captive financing) out of the way."

Improving Margins

Tony Boutelle, president and CEO of CU Direct, Ontario, Calif., believes as rates tick up credit unions will enjoy a lower cost of funds than banks, since many CUs tend to lag behind banks in raising their deposit rates. "Credit unions are looking forward to rising rates, and their margins may improve. They will have an advantage over banks in the marketplace for a while, I predict."

Melinda Zabritski, senior director of automotive credit for Experian, Costa Mesa, Calf., posited that new car sales could increase as rates begin to inch up, bringing in many buyers who have been on the fence. In the longer term higher rates won't pull too many buyers from the market, contended Zabritski, pointing to pre-recession new car sales that were at record levels. "Pre-recession we saw rates at least a couple hundred basis points higher than we have today and sales were at record highs."

'Good Things Ahead'

Pete Radike, director of product management for Fiserv's lending solutions division, Brookfield, Wis., contends that with consumers focused on monthly payment and always wanting greater service that credit unions are in great shape when rates move up. He predicted that manufacturer deals will become less attractive, with carmakers offering low rates on fewer models with often short terms that boost the monthly payment, meaning car shoppers will be more likely to turn to financial institutions.

"In the general financial institution auto loan market, credit unions have a competitive advantage over banks with lower rates, plus they have great relationships with their members and can service them better," said Radike. "I see good things ahead for credit unions."

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