April 2, 2014
Credit Union Management magazine’s Web-only “Loan Zone” column runs the second Wednesday of the month.
Heading into 2008, as an action plan to support our Gen Y strategic initiative of attracting younger members, Directions Credit Union implemented a first-time car buyer loan program. This program was offered only for direct loans, and was tailored to attract the younger borrower who has little or no credit, short job time and minimum income. (Read more about the program in “Loan Zone: First-Time Car Buyer Program.”) The success of the direct program helped fuel our decision to implement an indirect program just four years later.
Traditionally, many of the consumers served by our first-time car buyer program would not have qualified for a loan. At best, they would have to use a qualified co-signer. Our direct product enables these typically younger borrowers to obtain the loan in their name only, which we hope will make them that much more of a loyal member of Directions CU.
The structure of our direct loan program for first-time car buyers gives us the opportunity to meet with the member face to face, and to provide an online tool for financial education. (This is MoneyEd Personal Finance Program offered through Trinity Debt Management.) We feel that this combination of electronic education coupled with a face-to-face meeting is an important first step for this segment, as they enter the world of credit.
Initially, we rolled out the program in a low-key fashion, with little promotion. The idea behind starting slow was to take advantage of the opportunities when they presented themselves, monitor the performance of the program, and make any necessary adjustments. With this approach we did about 30 loans for $250,000, in each of two subsequent years, 2008 and 2009.
The direct program really took off in 2010 after we made some adjustments to it, including decreasing the maximum loan amount and minimum income requirements, increasing the length of employment requirement, and establishing an interest rate for those borrowers with no credit score. (This rate is 3.25 percent higher than our B tier rate.)
We also started to promote the loan as part of our Mylife product offerings. In 2010 we did 83 loans for $750,000; in 2011, the program peaked with 175 loans for $1.4 million.
With us doing that much used car financing, it was inevitable dealers would catch wind of things; and they did during the later part of 2011. Having a couple of years of managing the direct program, we felt confident enough to “informally” allow our first- time car buyer loan to run through our indirect loan program.
What we did was apply our existing first-time car buyer loan structure and underwriting guidelines to any loans coming through the indirect channel that had the potential to qualify for the direct first-time car buyer loan program. (See previous article for details.) We felt this was a good “test” to gauge whether the product fit the indirect world, as well as observing how the dealers would handle this sort of product.
Needless to say, by the time 2012 came around, it was obvious this was a popular loan product for the dealers and an excellent “niche” product for us, as there were no other lenders in our market offering anything comparable.
So, heading into 2012, we decided to formally implement a true, indirect first-time car buyer product. We run our indirect program through CRIF, Atlanta, so we simply created a separate program with them for our first-time car buyer program. The program is completely separate from our traditional indirect offering, and really stands out with its separate and unique program rate sheet. Our dealer network was already familiar with our traditional indirect product and now had a separate and unique program to work through. The indirect first-time car buyer program took off quickly. In 2012, we did 229 loans for $2.2 million. Adding to that, we continued to see results from the direct program, originating 140 loans for $1 million. In 2013, indirect first-time car buyer loans totaled 180 for $1.6 million; direct first-time buyer loans amounted to 102 loans for $700,000.
The data supports the idea that this product is an excellent way to attract young members, as 90 percent of the loans made through this program have been new members. It’s too early to gauge fully how the indirect portfolio is performing, but to-date losses are around 3.6 percent. Another intangible is that by having a niche product like this, we got dealers’ attention a bit more, which naturally leads to more business.
There are some downsides to having an indirect first-time car buyer program. First and foremost is the fact that we lose the opportunity to meet with these borrowers face to face in our branch, followed closely by the fact that it’s nearly impossible to incorporate the online financial education piece into the program.
We’ve also had to monitor the dealers’ handling of this program very closely. We had a couple of dealers that were only sending us first-time car buyer loans, which prompted us to address the matter with them and require them to send us a certain mix of traditional business.
Overall, however, we are happy about our decision to incorporate our first-time car buyer product into our indirect program.
CUES member Tim Crosby is VP/loan development at $575 million Directions Credit Union, Sylvania, Ohio.