What does this mean for your credit union? History shows that credit union new auto underwriting essentially stops when the manufacturers are offering very low rate loans. So how can a credit union compete? Credit unions should continue to promote new auto lending and educate members about the ability to take the manufacturers rebates and apply it to the loan amount at the credit union. The math almost always works out better for the member, but the “too good to be true” side usually overrules the math and the member goes with the zero percent. Of paramount importance is not trying to price the credit union’s new auto loans lower than what you can afford. Consult with your asset and liability people when setting rates, so you can see the impact rate decisions will have on the credit union’s future balance sheet.
What else can be done? If your credit union is still pricing used auto loans above new auto loans you might want to think about why. Here are a few starting points to use when thinking about all loan pricing:
- Does some form of collateral back the loan?
- How liquid is that collateral?
- What underwriting standards are being used?
Auto loans (both new and used) are collateralized by the car itself, but we all know that the depreciation on a car is front-loaded. In the first two years many cars will lose up to 40% of their value and many cars have lost over 50% in three years. Couple this with the fact that many credit unions will finance more than the list price of the car, and your credit union could find itself with a loan that is only partially collateralized, but is priced as if it is fully collateralized.
Used cars are farther along on the depreciation schedule so they are losing their value more slowly. Couple that with the fact that most credit unions do not lend above the value of used cars, so you have a car that is better collateralized when the loan is made and should stay better collateralized as the loan matures. If your credit union is using the same lending standards for both new and used auto loans, you can actually make a case for the interest rate on used autos being lower than new autos. Now here is the best part – the manufacturers captive finance services and the banking industry still treat used auto lending like the ugly duckling. Used autos are almost never priced aggressively and they are usually not heavily promoted. This gives astute credit unions a great place to put excess liquidity, while using a loan they understand and are good at delivering, with little by way of price competition.
If you have any questions regarding the services and program offered by Mid-Atlantic Corporate, please contact a Corporate Account Manager by calling (800) 622-7494.
