Borrowers are Getting Nearly Every Loan at the Dealership. Here’s Why that Won’t Change
The Good Old Days.
Gas was cheaper.
Unsolved Mysteries was the only reality show on TV.
Twitter did not exist.
And people actually went to their local credit union to get approval for a loan before visiting a dealership to purchase their next vehicle.
It was a pretty wonderful world.
Unfortunately, it disappeared long ago.
Of course, that doesn’t mean the world we live in today is terrible.
Remember paying by the minute for a long-distance call? Remember paying $20 for the whole album or CD just to get that one song? Remember when you had to watch actual commercials?
Remember when you had to visit a credit union or bank before going to a dealership?
The folks who run dealerships and the folks who run credit unions love what they do—and they should. Car dealerships are a vital part of any local economy. Credit unions play a role in community health in a way that is unmatched by any other financial institution. But to most borrowers, the idea of sitting in front of a loan officer and a car sales attendant on the same day is something they would rather avoid.
Especially if they are a nonprime borrower.
The truth is that some rejections matter more than others. For nonprime borrowers, the risk of being told “no” by their local credit union after applying for an auto loan is high. Most credit unions view being good stewards of their members’ money through an almost zero risk tolerance lens.
Being told “no” by a loan officer is demoralizing, especially for buyers building or rebuilding their credit profile. Why would you risk rejection when the dealerships are barraging you with a message that tells you ‘we have a loan for everyone’?
Dealers have a network of lenders capable of serving a wide variety of borrowers, including those with less than perfect credit or even bad credit.
Of course, a nonprime borrower who gets their loan at a dealership also experiences rejection.
They just don’t find out about that rejection until long after they’ve purchased their car. Those adverse action notifications are often tossed in the recycling, along with the rest of the junk mail.
Over eighty percent of all auto loans are made indirectly at the dealership. That’s a daunting statistic worth repeating – in the US, 17 of every 20 auto loans are made at car dealerships! Credit unions simply can’t out-market the combined financial strength of dealers, manufacturers, and the nation’s largest lenders. Dealerships also have shiny objects. Shopping for the actual car is fun.
Across the country, credit union executives have learned this lesson the hard way.
For prime indirect loans, captive and national lenders offer such low rates that the lender makes almost no net yield when combined with dealer fees. For below prime borrowers, lowering interest rates will not bring more borrowers in the door. Interest rates rarely motivate such borrowers.
Borrowers with credit scores below 700 almost always make their decision based on the monthly payment.
Investing more money in marketing also won’t bring more borrowers into credit unions looking for car loans. Billions of marketing dollars have created a perception that cars with payments are bundled together] Local credit unions simply cannot fight the marketing machine that drives borrowers to dealerships.
Credit unions need to stop being reluctant indirect lenders, and start being the best indirect lenders. Credit unions have to be a preferred option for dealers selling new or late-model vehicles to nonprime borrowers, where yields are strong, and risk is predictable.
Mission-driven financial institutions can strengthen their yield by becoming competitive lenders in the nonprime auto loan market. They can give borrowers in their community a chance to build a stronger financial foundation that will serve them for the rest of their lives. They can expand the credit union’s ability to serve as stewards by making profitable, safe loans to nonprime borrowers.
Credit unions are mission-oriented organizations.
At Proforma Fund, we think of them as the unsung heroes of their community.
That is why we ensure that a loan made in partnership with Proforma Fund will never result in a credit union on the hook for a default. Our advanced risk analysis, data management, member services, advocacy, and default prevention strategy means that credit unions can mitigate their risk while offering nonprime borrowers auto loans on new or late-model vehicles.
The world has changed.
For credit unions, the Good Old Days may be gone for good—but the Better Tomorrows can still lie ahead.