According to the Credit Union National Association (CUNA), “69% of credit union auto loans originate through the indirect channel, and only 5% of those indirect members use additional credit union products.” Once the indirect loan has been paid off, it is challenging for the lender to extend the customer relationship. Any future engagement is with the dealer for service and maintenance.
Profitability is continually squeezed due to steady increases in dealership fees, which have grown considerably in most markets, and in turn, reduce margins. In addition, quicker rates of pay-off, increased charge-offs and delinquencies add to profitability concerns with indirect lending. Marginal applications (not up to the institutions underwriting standards) and dealership loan documentation discrepancies further create the need to have effective oversight.
Of course, most credit unions also provide direct lending. This helps create stronger member relationships and enhances the credit union’s ability to sell other lending products to their members. However, the availability of auto loans through a credit union does not equate to increased direct lending volume.
The decision to focus on indirect lending vs. direct lending for auto loans is more than just a coin toss. For many credit unions who based the bulk of their portfolios on dealer-driven loan business, the decision to increase focus on direct lending can seem empowering. However, to be successful, lenders seeking to increase their direct lending portfolio will need to focus on savvy marketing, customer service, and differentiated loan offerings with consumer protection products.
Focus on Existing Members First
Credit unions are making advances with student loans, credit cards, and first mortgages. These existing members are great prospects for an auto loan. The relationship already exists, and the lender is intimately familiar with the member’s credit history. But don’t assume the member will automatically turn to you when shopping for a new vehicle!
Through direct lending, your loan officers have the opportunity to develop a one-to-one line of communication with qualified, vetted members. However, you can’t just rely on individual conversations to increase auto loan volume. Enhance that personal touch by putting into place a continuous contact strategy through email, social media, and print materials to proactively educate your members on the benefits of getting their auto loan with you. Millennial and Gen Z consumers demand online communication and will select a provider based on ease-of-use.
When it comes to differentiating your institution with both members and nonmembers, think beyond competitive interest rates and provide tangible value with consumer protection products. Products like a vehicle service contract and vehicle return protection protect the vehicle, consumer and lender in case of an unexpected vehicle breakdown or life event which could hinder timely payment.
Building a Profitable Relationship
The goal of direct lending is to gain a lifelong relationship with a new member, not just a loan. Having membership-friendly, built-in incentives for cross-sales helps generate faster on-boarding for additional services. Competitive rates, optimized consumer protection products, and a lender that understands the customer’s needs are all benefits that will pay dividends in a competitive market.
With more than 40 years of experience in the retail automotive industry, EFG can help your institution stay at the forefront of the changes affecting your industry today. Contact us today to learn how to get started.