What You Don’t Know About Your Collateral Can Cost You
When it comes to booking a loan, dealers pretty much have the inside track. They have the cars. They do most of the advertising. They get the face-to-face showroom meetings.
After dealers, credit unions are the largest direct auto lenders. They achieve this by participating in credit union leagues or associations that partner with dealerships. They also compete through fast loan processing, such as by electronic decisioning, and with better member services. However, collateral valuation is an often overlooked area where a credit union can both improve revenue and generate savings.
According to Christine Pratt, Senior Analyst with The Tower Group, “…missing options and style levels could add thousands of dollars to an automobile’s value. Consequently, it is difficult to deliver precise collateral values.”
What’s It Really Worth, Really?
Close to 17 million new cars were sold last year, across more than forty major makes, a multitude of styles, and thousands of different options. Three times as many used vehicles were on the market.
Yet one style does not fit all, even within a particular make. For example, the 2005 Ford F-150 series has several basic style levels. There’s the Regular Cab 126” XL, the 126” STX, the 126” XLT, and so on. Each style level gives you multiple vehicle options—with different associated prices--from which to “build” your own vehicle.
Granted, the domestic pickup choices available to consumers can be dizzying. But even a relatively mid-range foreign make, such as the Audi, presents interesting vehicle option choices. A 2004 Audi A6 4-door, for example, gives you multiple “entertainment” packages.
The Sirius Premium Audio Package for the Audi A6, with an Invoice price just under and an MSRP just over a thousand dollars, includes a BOSE premium sound system and the Sirius satellite radio. Whereas, the upgraded XM Infotainment package carries an MSRP of $1,800. If your member’s car has the XM Infotainment package but you merely list a generic entertainment option, at, say, $1,000, you’ve miscalculated the collateral by as much as $800—based on one option description alone! As a financial institution, you can’t afford to overvalue or undervalue your assets.
Clearly, managing collateral specifics could save your credit union thousands, if not millions, of dollars. But doing so requires pinpoint accuracy at four stops along the automotive retail highway.
Capturing the Loan
The most logical place to fully describe a vehicle is at the loan origination system. An automated and granular level of vehicle description at the point of loan origination could be based on Year-Make-Model-Trim or VIN (vehicle information number). The expected benefits of a fully-described vehicle, especially one that could define all options at the style level, would include improved auto-decisioning support, better book-to-look ratios, quicker turnaround and reduced portfolio risk.
Funding the Loan
A consistent, system-wide, robust vehicle description would enable you to correctly underwrite the loan value during the contract stage, helping to prevent your credit union from lending too much money on a particular vehicle. Using the same vehicle descriptions for the application and contracting steps can improve asset quality and validate accuracy. Plus, you’ll sleep easier at night.
Managing the Loan
Once the loan has been funded, you still need to know what’s on or could be on the vehicle. Accurately identifying vehicles can eliminate billing, titling or program management errors later on. Some vehicle data descriptions are based on the automaker’s original equipment list, making it easier for you to assign a correct value. The net result is a better understanding of your credit union’s assets under management, either individually or as part of your overall portfolio.
Getting the Next Loan
With fingertip access to a full description of the member’s vehicle, you are better positioned to secure another loan. You can promote the details of similar vehicles, as well as the trade-in value of their current vehicle, to your members, helping to participate in their next purchase.
Simply put, whether you’re analyzing the value of a loan, lease or repossession, what you don’t know about your collateral can cost you. And with an auto finance market that’s expected to exceed $800 billion this year, we’re not talking chump change. Here at Chrome Systems, we like to say the “vehicle is in the details.” But, more importantly for your credit union, so is the loan.
Chrome Systems, Inc. pioneered the technology behind electronic vehicle configuration close to 20 years ago and continues to lead the industry. Today, Chrome's complete and accurate vehicle descriptions and prices facilitate online loan origination and enable lenders to better understand the true value of their collateral.
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