Credit Unions have been helping members finance vehicles ever since they were first established. Over many decades, CU’s have grown their indirect auto loan portfolio with aggressive rates and technology upgrades through dealership financing relationships.
Unfortunately, when all is said and done, margins have begun to shrink. Some dealership relationships actually generate negative margins when all costs are accounted for. We have seen this happen far too often. We know of a well-run $1.6 billion-dollar credit union only reported a .7% profit margin.
In addition, COVID-19 has dramatically changed the buying habits for most consumers. Shelter in place guidelines have almost completely shut down new auto sales at dealerships, which in turn has reduced indirect loan volume to all-time lows.
Dealerships and Captives are advertising: “No Payments for 90 Days”, “Shop Online and Save”, “Free Pickup and Delivery”, but are still not getting the pre-pandemic volume. Most Americans are quite aware of the downturn in the economy. They’re not only worried about their 401Ks, but now their next paycheck. With a record 25 million consumers applying for unemployment between mid-March and mid-April, households are looking for ways to save money now more than ever.
Refinancing current auto loans and saving a substantial amount of money each month is extremely attractive to most consumers. Auto payments are typically among the top three expenses each month for most families.
One of our largest clients with a national presence, commented that last month was the first time the number of refinanced loans exceeded indirect loans for their institution. We firmly believe a well-balanced auto loan portfolio that includes both indirect and direct auto loans is essential to grow the overall profitability of the portfolio and serve as a hedge in a market downturn in auto sales. The more profitable direct loans also reduce the churn of loans, as they typically retain a rate three times that of indirect loans. We like to refer to direct loans as lifers versus loaners.
To expand upon the premise of a well-balanced auto portfolio, we rarely see clients and prospects working to make the households associated with each indirect loan more profitable. We believe this is a tremendous opportunity waiting for a solution. To that end, we have been developing a comprehensive approach to dealing with this issue. The approach will ultimately have a data-driven component combined with very targeted marketing efforts to drive profitability and retention of these valuable households. We will be launching our new product, Stellar Indirect Tool Kit mid-summer once beta-testing is completed.
In the meantime, as the economy begins to return to a more normal state, we encourage all institutions to give thought to how this pandemic has and will continue to change the way we approach business. We see focus changing on a number of fronts that in many ways will enhance our client’s ability to service their customers. As long as we all view this period in time as an opportunity, we believe good things will develop.
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.