The Rise Of Indirect Lending

Indirect auto lending overtook direct lending one year ago, and first quarter data shows no sign of a slow down.

Indirect auto lending the process wherein a consumer obtains an auto loan through a car dealer as opposed to directly from a financial institution is on the rise in the credit union sphere.

Philosophically, the industry’s opinion of indirect lending is split. Some credit unions believe indirect lending brings in new members who otherwise would not tap into the cooperative FI model. Others believe indirect lending adds hidden costs and unnecessary layers the credit union must break through to build personal relationship with members.

However polarizing the topic, indirect lending is in the midst of a boom and continues to grow every quarter.

In the past 10 years, indirect lending as a percentage of total auto loans has climbed from 38.2% in first quarter 2006 to 52.5% today. For the past few quarters, indirect lending growth has outpaced direct lending. Year-over-year, indirect lending boasted a 18.8% growth rate while direct lending expanded 7.6%.

Indirect lending overtook direct lending in the first quarter of 2015 and has remained on top for the past five quarters. Meanwhile the gap between direct and indirect delinquency is closing, now only 0.51% and 0.57%, respectively.

INDIRECT LENDING BREAKDOWN BY NUMBER OF CREDIT UNIONS INDIRECT LENDING BREAKDOWN BY TOTAL AUTO LOANS

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16

Source: Callahan Associates.

DISTRIBUTION OF INDIRECT TO TOTAL AUTO LOANS

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16

Source: Callahan Associates.

It is important to note that fewer than half of all credit unions participate in indirect lending; however, those that do account for a large percentage of total auto loans.

As of June 1, 2016, 1,813 credit unions of the 5,955 for which first quarter data is available reported holding both direct and indirect auto loans. These credit unions represent 30.4% of all credit unions but 76.9% of the industry’s total auto loan portfolio.

The remainder hold no auto loans (172), hold auto loans but no indirect loans (3,883), or make other indirect loans, such as lifestyle loans, outside of the auto portfolio (87).

Of the 34 credit unions that hold more than $1 billion in auto loans, only five do not participate in indirect lending. For the other 29, the average percentage of indirect loans to total auto loans is 67.4%. For representing only 30% of the industry, credit unions that participate in indirect lending are significantly impacting the auto portfolio.

June 6, 2016

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