Pentagon Federal Credit Union is hoping a newly inked agreement with Auto Financial Group (AFG) will prop up its balloon financing business to at least $10 million per month, said Ivan McBride, vice president of automotive lending products and sales at PenFed.
Last week the companies announced the partnership, which enables PenFed to offer members AFG’s residual based financing program, called the Balloon Lending Program. Balloon loans do not fully amortize over the term; rather, the sum of the monthly payments covers only a fraction of the principal balance. The remaining balance is due at the end of the term, when the borrower can trade the car using any accrued equity, pay off the remaining balance, refinance the vehicle, or in some cases, walk away without paying.
PenFed’s current residual based financing program, called Payment Saver, funds $1 million to $2 million of volume per month, McBride said. With the AFG platform, to be called Payment Saver Plus, McBride expects the credit union to originate $10 million to $20 million per month, “at minimum.”
Payment Saver Plus is slated to roll out on PenFed’s indirect loan platform in May; it will become available on the direct platform by the fourth quarter.
The new platform has broader eligibility requirements than Payment Saver, which is only offered on direct loans for sedans two-years-old or less to applicants with Fico scores of 700 or higher. Payment Saver Plus, however, is available on several segments of vehicles as old as five years to applicants with 650 Fico scores and, “most importantly, the ability to walk away from that balloon if they choose to,” McBride said. On average, PenFed estimates payments on this program might be 40% lower than payments required by conventional financing. Terms will range from 24 to 72 months.
While most members keep their vehicles at the end of term, AFG will handle post-term processing and remarketing for those who return their vehicles, McBride said. Meanwhile, PenFed will sign over the title to AFG for that vehicle and within 30 days of the maturity date, AFG will send PenFed a check for the residual payment, a value decided by PenFed at the beginning of the loan term.
AFG buys insurance to cover any deficiency balances if vehicles fetch less at auction than the predetermined residual payment, McBride noted. “If the member plans to walk away from that balloon amount [and] AFG makes arrangements, within a 30-day period PenFed [will have been] made whole on that residual, so we don’t see a lot of risk in this program,” McBride said. PenFed pays an upfront fee to AFG for each balloon loan originated.
AFG has more than 100 lenders on its Balloon Lending Program, including Corning Federal Credit Union, State Employees Federal Credit Union, and Sound Credit Union.
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