It’s impossible to be in the auto lending business and not be keenly aware that auto loan interest rates are in a low holding pattern. According to the NCUA, the average interest rate for a new vehicle with a 48-month term is 2.58%, as of December 2015.
The competition is stiff, and unfortunately, the interest revenue generated from each loan is minimal when rates are as low as they have been over the past decade or so. In fact, according to the 2014 NADA Data report, auto dealers had a meager profit margin of 2.2% in 2014, even though they sold 16.43 million units.
However, even in this low interest rate environment, credit unions can turn lemons into lemonade when it comes to their auto loan revenue. To be frank, unless there is a major shift in interest rates (not likely) or lending strategy, credit unions have no choice but to adapt. When new and used vehicle loans make up 13% and 21%, respectively, of credit unions’ loan portfolios as of Sept. 30, 2015, auto lending interest revenue is critical to the health of credit unions.
Low Rates, Larger Loans, And Longer Terms
One of the most significant silver linings of this rate environment is that borrowers are willing to borrow more and for a longer period of time. Low interest rates are certainly bringing borrowers into the doors of their financial institutions and local auto dealers, willing to make new and used car purchases that they may not have been as open to at higher interest rates.
And further, these lower interest rates can make a difference in the borrower’s buying decision — giving them a low-cost incentive to borrow more and for a longer period of time.
In general, the primary focus for credit union auto lending is prime and nonprime loans, both of which saw a substantial uptick in the average new and used amount financed in Q2 2015. The average amount financed for new, nonprime auto loans was $30,142, up from $28,890 in Q2 2014, according to the Q2 2015 Experian State of the Automotive Finance Market Report. Further, both new and used vehicle financing terms have increased for 61-72 month loans; up 3.2% and 3.5% for new and used loans, respectively.
Alternative Income Streams
Larger and longer loans also means that borrowers are taking on more risk for major losses if their vehicle is ever totaled or stolen and not recovered. Offering borrowers vehicle protection plans such as Guaranteed Asset Protection not only protects their auto investment, but it protects the lender from potential losses and generates valuable fee income — fee income that can make a huge impact on the credit union’s bottom line in this environment of shrinking auto loan margins.
Vehicle protection products offer financial institutions and their borrowers several benefits, creating the quintessential win-win scenario.
Additional and dependable new revenue streams
Increased member loyalty from value-added products
Lower risk of vehicle loan defaults after accidents or unrecovered thefts
Reduce or eliminate out-of-pocket expense for the remaining loan balance in the event of a total vehicle loss or theft
Remain in good financial standing with their lender and protecting their credit rating
Gain peace-of-mind from knowing their loans will be covered in the event of a total loss or theft
Enjoy the ability to purchase a new vehicle sooner after an accident
There’s very little consumers or lenders can do about interest rates or the state of the economy, but offsetting interest income loss is feasible, and one of the most effective way to turn lemons into lemonade.