Subprime lending is overlooked by many in the credit union community . Concerned about higher delinquency and charge offs, many credit unions have conservative lending guidelines that limit their ability to serve new members with impaired credit. However, with the subprime lending market growing 5% a year, the need for more flexible guidelines will only increase. Credit unions can use this as an opportunity to build a niche by serving subprime markets.
Credit unions are gifted at developing strong relationships with their members. By developing relationships with less credit-impaired members, credit unions can help members improve their ratings, be less likely to default and create a valuable long-term relationship.
Subprime indirect lending among credit unions can vary greatly. Each credit union has the ability to customize their approach to this type of lending, and each approach can bring benefits such as:
Additional Interest Income: Credit unions can expect higher income due to the higher rates of non-prime loans. For example, a 5-year $10,000 loan at a rate of 18% can bring an extra $3,600 as opposed to a prime-lending rate of 6%.
Underwriting Model Flexibility: Credit unions have the option of choosing a program that is in-house or that is outsourced to a CUSO or third-party vendor. Each option has its own perks for the credit union.
- In-House: Some credit unions prefer to control their indirect lending programs so that they can review their loans on a case-by-case basis. Bad and no credit applicants are reviewed individually, and the effects of the loan can be managed carefully and internally. Some credit unions customize bands of credit scores to better define their specific borrowing market. In-house also helps promote member loyalty and trust, as well as aid those individuals who need a car in order to earn income. The credit union can monitor its success and quickly change an aspect not working correctly.
- Outsourcing: Some credit unions are turning to a credit union service organization (CUSO) or a third-party vendor to service their programs. Such organizations have a staff that is experienced and knowledgeable in successful subprime lending. Dealers have often worked with such companies, which eliminates the time credit unions may spend forming and maintaining those relationships. Additionally, credit unions can extend their geographic reach ultimately expanding their potential client base with the extended dealer network.
- A Blend: Seeing benefits with both, some credit unions are looking to blend the options to provide the best service. Credit unions with subprime lending are developing their own hybrid to best suit their needs and the needs of members.
Member Growth Opportunities: With the increased demands for subprime lending, credit unions can look to subprime lending as a change to attract new members within the limits of their operations. Individuals need cars to be able to work, and they need to work to be able to afford cars. This need fits neatly into the credit union philosophy of servicing their community and membership.
There is not a set equation for a successful program. Success is dependent upon your membership, the size and experience of your staff, consistent monitoring, and goals for the future. Credit unions looking to offer such a program must be open minded to a changing environment and new avenues.
To learn more on how subprime lending can work for your credit union, join us for a webinar on “Best Practices in Subprime Indirect Auto Lending”, brought to you by Callahan and Associates.