Auto Loans: Pitfalls Of Indirect Lending |
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Around the time credit unions felt the greatest need to lend money, automobile manufacturers came up with highly lucrative financing incentives for consumers. Shares have spiraled faster than auto loans of the past four years and credit unions experimented on lending alternatives like indirect lending programs to increase auto loans growth. Most credit unions offering indirect lending programs provide good service but many may not be familiar with the risks in indirect lending. Compelling Growth, But Where's The Beef? The last quarterly call report data finds credit unions engaged in indirect lending programs increase their auto loans growth rates by more than double. Member growth is higher as well due to the ability to reach new members through dealership. Total indirect loans outstanding was in excess of $50 billion covering over 12% of the industry's total loan portfolio and 32% of all credit union auto loans. Indirect Lending Mechanics In indirect lending a credit union arranges for a contract with a merchant for originating auto loans at the point of purchase like an auto dealer. Though it can be directly from the credit union to the dealer, it is more common for credit unions to partner other credit unions to boost buying power. Various CUSOs or Credit Union Service Organizations have come up nationwide simplifying participation of credit unions in the indirect lending market. Apart from enabling access for credit unions to multiple dealers and managing these dealings, they frequently take care of all the required paperwork. Revving Up Your Auto Loan Portfolio With Indirect Lending Irrespective of working with a CUSO or in-house relationships with a dealer, a price usually has to be paid to attract auto loans from the dealer. Dealer reserve fees, flat one-time fees and processing fees are the most common charges in indirect lending. The credit union sets a minimum rate for the dealer's auto loans also known as the buy rate. Credit unions often let dealers hike the rate from a pre-specified amount to the contract rate that the consumer pays for the loan. The dealer may be allowed a share of the difference of the buy and contract rates, known as the dealer reserve. Dealers and CUSOs may also charge a flat fee for every loan. This fee can be a fixed dollar amount or more commonly, a percentage of the original auto loans amount. The third common fee type is the processing fee usually less than the flat fee and dealer reserve. Things To Consider Credit unions comfortable with the fee arrangement with the CUSO or dealer still have to tackle the additional issues of indirect lending. Return on the loan is not the sole consideration with the credit union requiring consideration to cross sell back-end products, operational costs of processing direct auto loans versus indirect loans and the potential philosophical apprehension of credit unions in indirect lending. Alternatives To Indirect Lending Credit unions reluctant about indirect lending have other proven strategies capable of successful growth of their auto loans portfolio. An example is paying the member cash of $50 to $100 for pre-approval of auto loans. Here the loan officer needs to enlighten the member of the advantage in financing through the credit union. The loan officer handling the credit report for pre-approval is also able to identify other possible loans for the credit union to refinance for the member. An extra $50 to $100 is given to the member when buying the car and financing through the credit union. The critical need for the loan officer is to follow up with the member following pre approval to prevent the credit union's loss of the member's business to the car dealer. Once the member decides on doing business with the credit union, $100 to $200 can be his. Using this strategy or indirect lending means buying your member's business. However here, the money goes to your member. For this incentive strategy, credit unions need to avoid a similar yield dilution in indirect lending. Cash incentives to members guarantee a rate of return lower than the auto loans rate and based on loan prepayments, the loan may not be profitable. |
