On June 24th, President Obama signed H.R. 2346 into law. This bill, the Consumer Assistance to Recycle and Save Act of 2009 (or the CARS Act), contains an initiative that provides government vouchers for up to $4,500 to individuals trading in old vehicles for a new vehicle purchase. With this program, unofficially known as 'Cash for Clunkers," positioned to drive a major increase in new vehicle sales, what should your credit union be doing to help your members take advantage of this new initiative?
How the Program Works
While the idea of Cash for Clunkers may be new to many of us here in the States, this program is largely based on scrappage programs that have been running in nearly a dozen European countries as far back as early 2007. The idea behind these programs is simple, offering a monetary incentive for individuals to trade in their current vehicle and purchase a new, more fuel-efficient vehicle. These programs serve the dual purpose of driving vehicle sales, while also having a positive effect on the environment as so called "gas guzzlers" are taken off the roads.
The basis behind the U.S. version of this plan focuses on "clunkers" that average 18 miles per gallon or less, and are still in drivable condition. Individuals may trade in their "clunker" for a new vehicle, with two levels of rebate available depending on the estimated gas mileage of the new vehicle. Purchasing a new car that is 4 MPG more efficient than the previous vehicle nets a $3,500 voucher, and cars with a 10 MPG or more improvement are eligible for a $4,500 voucher. The cutoffs for trucks are slightly more relaxed, and are set at increases of 2 MPG and 5+ MPG, respectively.
What Your Members Need to Know
As this initiative continues to receive widespread press coverage on both the local and national circuits, your members will likely be aware of the program, and may even be considering taking advantage of the offering. While the government has taken key steps to make sure that they are protected (such as requiring vehicles to be destroyed by the dealer so that cannot be cashed in more than once) there have been few steps taken to protect the average consumer. So how can your credit union help your members better understand this program, and ensure that they get the most out of this offering? By making sure your members are properly educated about the program.
While certain aspects of the initiative have received a substantial amount of press, your members still may not understand the intricacies of the program. Taking proactive steps to educate these members about Cash for Clunkers helps position your credit union as both a trusted financial advisor, and a source of financing for the upcoming new auto loan. The first step you should help your members take is to ensure that both their previous vehicle and potential new purchase meet the fuel economy standards set forth by the bill. Consider directing members to online options that can provide the official fuel economy of each vehicle, helping them determine whether or not their current vehicle qualifies under the program. One example is FuelEconomy.gov, which is run by the EPA. Prominently posting links to these resources on your website will also help drum up interest in the program.
The second component of program education for your members centers on the trade-in value of the member's current vehicle. While critics of the bill have recently begun to highlight this issue, many individuals are still unclear about the fact that the government vouchers are meant to replace the trade-in value of the vehicle, not to supplement it. This means that if your member's current vehicle has a trade-in value of more than $4,500, they would actually lose money by taking advantage of the program. There are a number of online resources, such as the Kelley Blue Book, that you can make available to help your members determine the appropriate trade-in value of their vehicle.
The third item that your members need to clearly understand is one where the credit union should be most active, and that is proper financial planning. While qualifying members will no doubt be spurred on by the $4,500 discount, the credit union should work with members to help them understand the true financial impact of this purchase. While a $4,500 discount will certainly help the member's financial situation, trading in a vehicle that was paid-off for a new car payment may require some additional financial planning and savings on the part of the member.
The Potential Benefits for Your Credit Union
While serving your members is a credit union's main objective, there is also no doubt that with the increased vehicle sales this program is likely to drive, there is also the potential for a surge in auto lending volume if your credit union is positioned appropriately.
One factor in credit unions' ability to turn these sales into auto loan balances will surely be dealer relationships. The Cash for Clunkers program is run through the dealers, and dealers have to register to become a part of the program. Credit unions that already have strong relationships with local dealers may want to encourage those dealers to become a part of the program. For credit unions that do not yet have relationships with local dealers, now may be the perfect time to start. As the dealers will be working with individuals through the trade-in and car buying process under this program, the relationships that credit unions have with local dealers become even more crucial when the time comes to finance the purchase of the new vehicle. Credit unions that do not have indirect lending programs will want to prominently display the information they make available to members in branches and through the online channel. This will help the credit union become involved in the vehicle purchasing process early on, making it more likely that the member will return to the credit union when ready to purchase their new fuel-efficient vehicle.
While the full impact of this program remains to be seen, a similar program in Germany was responsible for a 40% year-over-year increase in sales just two months after the program was introduced. If the Cash for Clunkers program were to drive a similar increase in sales here in the States, credit unions, which have seen record market share thus far in 2009, are positioned to benefit greatly from this alternative. As credit unions continue to focus on protecting the best interests of their members, and work with local dealers to take advantage of the increase in sales volume, we will hopefully see an increase in auto loan balances as the results of this program take shape.
As credit unions look to serve an expanding membership base, many credit unions are adjusting their credit criteria to make financing available to a wider range of individuals than ever before. But with these relaxed credit criteria also comes a potential decline in asset quality. Join us on July 22nd for our upcoming webinar Driving Auto Loan Growth While Maintaining Portfolio Quality to hear from credit unions that are using proper risk management strategies to provide financing to members in need, without sacrificing the quality of their auto loan portfolio.