March 25, 2014
Credit Union Management’s Web-only “Loan Zone” column runs the fourth Tuesday of the month.
One of the initiatives in Directions Credit Union’s 2006 strategic plan was to find ways to attract younger members to the credit union, specifically the Gen Y segment. After researching a variety of sources, we concluded that a first-time car buyer product was arguably the best way for us to attract younger members.
Who doesn’t remember their first car? The institution that finances a first auto purchase and makes it a positive experience has an excellent chance of developing a lifelong relationship with that younger consumer.
Our first-time car buyer program is tailored to attract the younger borrower who has little or no credit, short job time, and minimum income—in other words, those borrowers who would not qualify at all, using industry standard underwriting, or, at best, would only qualify with the help of a co-signer. We wanted our product to make it possible for younger borrowers to obtain their auto financing in their own names. The logic was that this would create a more loyal member.
We designed our underwriting criteria carefully, taking into account the possible characteristics of a first-time car buyer, while at the same time mitigating the risk associated with this type of lending as best as possible.
For example, we set a maximum loan amount of $12,000, require a verified minimum income of $1,000 a month, expect the borrower to have been employed for at least a year, require a 10 percent down payment, set a maximum debt ratio of 40 percent, and specify that the loan amount cannot exceed 75 percent of the borrower’s annual income.
We felt education needed to be a big part of this program as well. We ask that our first-time car buyers participate in an online MoneyEd Personal Finance Program offered through Trinity Debt Management. If the member completes the course and passes the auto loan finance quiz that’s part of the program, we give them a .25 percent rate discount.
Speaking of interest rates, Directions CU uses risk-based pricing. If our first-time car buyers have a credit score, they will get the corresponding interest rate. If they have not established a credit score, we assign them our B Tier interest rate. These loans are direct loans, originated and closed at the branches, underwritten and decisioned by the lending staff.
The program was initially marketed to our Gen Y members via an email and mailing campaign, and placed on our website. One of the initial offers was a .25 percent rate discount and no payments for 60 days. It has since been incorporated into our MyLife product offerings and is now marketed accordingly.
The program has been a tremendous success for us. Since its inception in the fourth quarter of 2007, we have originated 561 direct loans for $4.5 million. (The CU’s total auto loan portfolio is $104 million, excluding leases.) Of the 561 direct first-time buyer loans, 79 percent have been to new members. The average loan size is $7,961; the average interest rate is 5.98 percent. Losses, as a percentage of total originations, are running about 4 percent, vs. a loss ratio of about .51 percdent on our overall auto origination. However, we anticipated higher losses on this type of product.
We’ve made a few adjustments to the program over the years. We decreased the maximum loan amount and minimum income requirements, increased the length of employment requirement, and established an interest rate for those borrowers with no credit score. This rate is 3.25 percent higher than our B tier rate.
Some changes were in response to trends we observed while monitoring losses, while others were done in response to what we perceived as missed opportunities due to overly restrictive underwriting guidelines.
As mentioned earlier, the main reason behind our ¬first-time car buyer program was to have a unique product to help us attract Gen Y members, which then gives us opportunities to offer other products and services to that segment. The following shows how we are doing with product penetration with those members who have a first-time car loan compared to our entire membership.
|First-Time Car Buyers||Entire Membership|
|Directions CU Credit Card||26%||21%|
|Services per household||2.99%||2.34%|
We feel that our first-time car buyer program has been, and continues to be, a success. Not only is it accomplishing what we intended it to do in terms of bringing in younger members, but it has also become a very nice source for additional auto loans. It’s definitely become a “niche” product in our markets.
CUES member Tim Crosby is VP/loan development at $575 million Directions Credit Union, Sylvania, Ohio.