A residual based financing program that was anticipated to boost Pentagon Federal Credit Union’s balloon financing volume tenfold is ramping up slower than originally planned.
“Maybe we overestimated a little bit what market acceptance would look like right away,” said Ivan McBride, PenFed’s vice president of automotive lending products and sales. “It hasn’t ramped up as quickly as we would have thought. I think it’s going to take a little time to market the product and educate our dealers on how to present and structure it.”
PenFed rolled out the program, called Payment Saver Plus, on its indirect loan platform in late-July and was slated to launch it on the direct lending side by the fourth quarter. Now, the program will likely hit the direct platform in the second quarter of 2020. “That’s slowed down our volume projection and pushed it back to educate our dealers and eventually educate our members and consumers about the value of a balloon product,” McBride said. In March, the program was expected to prop up the credit union’s balloon financing business to at least $10 million per month, up from $1 million a month prior to the program’s launch.
Loans in the balloon lending program do not fully amortize over the term. Rather, the sum of the monthly payments covers a fraction of the balance, and the remaining balance is due at the end of the term. At that time, the borrower can trade the car using accrued equity; pay off the remaining balance; refinance the vehicle; or in some cases, walk away without paying.
“More than anything else, it’s just dealer education,” McBride said, adding that PenFed is being strategic about which dealer partners it chooses for the program. “We’re investing heavily in the right dealers, those dealers who already do pretty well with leasing and know how to present a lease payment because this product is very similar to a lease,” he said.
Looking forward, the credit union is optimistic about the program. “Although we are very early on in the process of training and onboarding dealers to the program, we could not be any more bullish on the value this product offers our dealers, their customers and our eventual members,” McBride said. “We are 100% committed to this effort and are confident that we will exceed all volume expectations for the program.”