How great would it be to have a crystal ball that accurately predicts the future? What might it foresee when it comes to strategic planning and budgeting for auto lending in 2020?
Available on the market are a myriad of “future analytic” programs that predict tomorrow’s business world with reasonable accuracy. But as to the extended future, that accuracy diminishes rapidly. Lending for automobile purchases involve some level of risk.
Every credit union tries to establish best practices to help ensure a member’s reliability to pay back loans. And, there are many models to consider today:
- Risk-based pricing models adjusted with historical data
- The 5 C’s of credit worthiness
- The latest “prognosticators” available from the credit bureaus
- Insurance for less than perfect credit
- GPS tracking to monitor the “assets on wheels”
- A combination of any or all the above
The objective is for the reward of income to outweigh the risk of loss due to lack of reimbursement and sound equity in auto lending.
So much emphasis is put into credit worthiness and sound repayment that a primary part of the overall equation is being ignored. That is: How to get more dollars of profit from these members to help offset the risk of loss, especially in a marginally-squeezed, automotive lending world.
Credit Unions must take a long term look at their auto loan portfolio mix — even beyond 2020 budget planning. They need to not just rely on any new loan, but also focus on increasing their member mix to include long-term relationships. One of our credit union lending partner’s Vice President of Lending likes to point out the need to “not just rely on loaners but increase their member mix to include lifers.” After all, “lifers” use their credit union as their PFI (Primary Financial Institution). They look at the credit union as a resource, not just for their current loan, but more likely for future financial services and guidance as well.
Currently, many credit unions have a large part of their loan portfolio dedicated to indirect lending. With dealerships demanding more, margins are continually being squeezed, while risk continues to grow. The risk is not only on the quality of the loan but comes with more potential legal issues as well — in which the financial institution could be held culpable.1
In addition, nationally less than 5% of these “indirect loan” members have a second relationship (other than the member service fee) with the credit union.2 Without additional relationships, there is no additional revenue that can help balance the profit vs. loss associated with the new member.
Many credit unions are now trying to rebalance their loan portfolio with more direct loan relationships. Direct loans generate more cross-selling opportunities, which in turn, increases overall member profitability. This helps reduce the risk in a reduced margin world. Here at Stellar Auto Loans, our credit union partners are averaging an additional $411 in non-interest income from GAP, MBI, AD&D, loan insurance, etc. per loan.
NOTE: Our experience, in the auto recapture world, is 27% of these new members open a checking account. The checking account is the primary relationship most consumers have with their financial institution. Our clients have historically averaged $143.30 per year in net fee income from each checking account. Plus, an additional $91 yearly in debit card interchange.
It’s worth noting 80% of auto loans are generated at dealerships.3 Most loans signed at the dealership by consumers average several hundred basis points higher than what most credit unions charge for the same credit score.4 AND, many charge a misappropriate higher amount to minorities5 and women.
Dealerships are continually adjusting their loan interest rates…and generally at a faster pace than the current market. This means that credit unions with a strong recapture program will be able to generate a higher pool of consumers — prospects that are more likely to benefit from a direct relationship with the credit union. Credit unions that have community charters to “help serve the underserved” or a special association that allow consumers the ability to become a member (outside belonging to an established SEG group) have a rare opportunity.
As with any opportunity, it’s essential to develop a strategic plan that can produce significant results. Consumers are busy. Consumers are smart. Simply broadcasting “best rates” will not bring the “best” results. Sure, consumers will respond. But, if the need is to undercut the competition to cut through the thousands of marketing messages broadcasted every day, it will dramatically reduce overall profit.
There is a large amount of data available for research to help marketing departments take a more targeted approach. Geo-specific data is available from US Census numbers. Credit bureau data is continually being updated at the household and individual level. In 2020, the use of technology and online platforms (digital, social media, mobile, online applications, etc.) will become even more critical to a successful auto lending marketing strategy.
Understanding the wealth of data and resources available, and how to procure those variables to best target an audience, may be as important as the marketing message itself. No single source has 100% of the information needed for 100% of the target audience. Most marketing departments do not have the tools to do this type of research…yet it is a critical component for success.
Predicting the future is never an easy task, and unfortunately, no crystal ball is going to point you in the right direction. Therefore, when it comes to an extremely competitive environment heading into 2020, it is VERY important to target potential members that provide the highest rate of return, as well as better long-term relationships. This is more easily achieved when having a strong direct lending strategy, instead of simply relying on indirect only.
George Monnier has spent over 18 years helping financial institutions generate new deposits and loans. He is a founding partner of Stellar Auto Loans, a division of Stellar Strategic Group, which offers pay-for-performance auto refinance programs to the banking industry. To learn more about Stellar Auto Loans, please contact george.monnier@thestellarfinancialgroup.com or 402-708-2425.
1 Claconnect.com: Fair Lending Compliance for Financial Institutions’ Indirect Auto Loans: 10/7/2015
2 CUNA.org: 2017 Lending Outlook, This Month in Credit Union Magazine: 11/2016
3 Responsiblelending.org: The State of Lending in America & its Impact on U.S. Households: 12/8/2012
4 Responsiblelending.org: Car Trouble: Predatory Auto Loans Burden North Carolina Consumers: 4/30/2019
5 USNews.com: How Dealers Cheat Borrowers with Interest Rate Markup: 2014/02/27