Is Indirect Lending Really an Option Anymore?
Consumers are purchasing cars at record rates with over 17 million vehicles being sold yearly. Credit union’s currently have 18% of the market share with Ally Financial, Wells Fargo, and Chase leading the way. In addition, the following J.D. Powers and Associates statistics reveal information useful to credit unions developing automobile financing initiatives in their communities:
- 87% of auto purchasers finance their auto loan directly at the dealership
- On average, consumers seek a new auto loan every 26 months
The 87% statistic proves that people prefer the convenience of dealership financing and argues that credit unions need a dealership financing presence or risk being left out of the equation entirely. There’s a tremendous amount of market share to acquire and we know time plays a major factor. Like it or not, auto dealers are not the enemy – they are selling something that your members want.
A mismanaged indirect program can be costly with losses superseding any hopes of profits or building new member relations. You’ll need to have a credit union employee who understands how dealerships work and one who appreciates that most car dealers are trying to close as many car sales as quickly as possible in order to make the most money they can. You should also be aware that some dealers—by no means all—will occasionally resort to what could be considered unethical and unscrupulous methods in order to make more money.
Keys to successful indirect Lending:
- Trust the dealerships you partner with and do not sign up any dealer who isn’t willing to truly partner with you. I’ve known a number of credit union CEO’s over the years that boasted about signing up dozens of dealers to send the credit union indirect auto deals. Know what you’re getting: You don’t want to only get the deals every other financing source has turned down. Form a positive working relationship with the management team at the dealership.
- Create an extensive tracking mechanism to measure your results. Measure delinquency and charge-offs by dealer. Tie the delinquency and charge-offs back to the loan officers that are underwriting the indirect loans. While this seems rather obvious, many credit unions programs have failed simply because the credit union became too enamored with the monthly volume of loans and neglected to measure the quality of the loans. Quantity isn’t everything: constantly examine the quality as well as quantity of deals you’re getting from each dealer and every loan officer.It’s vital with indirect lending to measure the trend of the score. Dealers know the inexperienced credit union new to the indirect platform can be fooled by an “A” score trending down. The problem is the majority of the time they have perfect pay history and should be an “A+” paper. This indicates the score is on a rapid decline, losing valuable points for capacity and escalating debt patterns. It’s also vital to add a secured debt ratio policy into your indirect program so dealers aren’t putting your members into vehicles they cannot afford. The other key element is stability. Non-owners or renters have much higher default rates.
- Focus on the timeliness of loan approvals and the funding of the contract for the dealer. With dealers, speed is essential. Ideally, you want to offer 30-minute turnaround times twenty-four hours a day seven days a week. If you are taking longer than that, you will ultimately lose the deals, which is very costly.
- Have a watertight dealership agreement drawn up and signed by each dealer and hold the dealer accountable to the agreement. Swiftly handle any issues that arise with the dealer. It’s vital you include first payment default and buy back guarantees for fraud/straw purchases to hold them accountable.
Keeping these thoughts in mind as you delve into an indirect Lending program should prove helpful in creating more successful partnerships and a viable program in the community your credit union serves. But, just as with any new initiative, credit union management must do the proper homework on the front end if the program is to be successful. Many credit unions throughout the country that have been able to develop successful indirect auto loan programs, which have become key elements in their strategic business plans.
Ed Swanson is Vice President of Lending/Consultant for Lending Solutions Consulting, Inc. For more information, please contact Scot Vackar.