Members Get a Second Chance With Niche Financing
When a teacher recently sought relief as she struggled to make the $500 monthly payments on her Volvo, Carolina Cooperative Federal Credit Union felt it had just the solution she needed.
Through a partnership with Enterprise Car Sales, the $43 million credit union in Charlotte, N.C., launched what it calls its "Basic Transportation" program. Enterprise markets the service as "Vehicle Connector." Credit unions, which can qualify members regardless of their credit score, help borrowers select a car that meets the buyer’s needs and price range. Enterprise pays Carolina Cooperative $250 for every loan approved. The credit union charges a 15% rate on all car loans, which are geared toward members who have less than stellar credit.
That teacher, who had a history of late payments, was able to go to an Enterprise lot, select a cheaper vehicle and reduce her monthly car payment by $200, said Paris Aranguiz, CEO of Carolina Cooperative.
"For some of these members, this is their last alternative," Aranguiz said. "They’ve suffered some really bad losses. Occasionally, they are upside down with their loans. For a lot of people, their credit has declined over the last three years."
The members using the program run the gamut from teachers to employees in manufacturing and textile plants, Aranguiz said. Generally, they have D and E credit. To qualify for a Basic Transportation loan, a member must have enough income to still pay their bills if they are approved. The credit union income-to-expenses ratio is 45%. The applicant must also be employed and a member of Carolina Cooperative for 12 months. Only used cars in the $12,000-and-under range are sold. Aranguiz said preapprovals tend to fall in the $8,000-to-$10,000 span.
Meanwhile, the economic downturn has led to a variety of scenarios that have caused consumers to fall behind in their car payments, said Ro Wilson, group business development manager for Enterprise Car Sales in North Carolina. Pay cuts and unemployed spouses are just a few of the more common scenes from members coming to Enterprise’s lots looking for cheaper trade-ins, he added.
"We see many people that were taken advantage of [through bad financing]," Wilson said. "They’re still trying to recover. Some never get out of the hole."
Aranguiz said the credit union has approved more than 150 retooled car loans since it launched its Basic Transportation program more than a year ago. The 15% rate that members are charged helps to cover any potential losses. So far, Carolina Cooperative has had only one, a loss of $2,000. That’s a far cry from the $5,000 to $10,000 typically seen with vehicle repossessions by way of indirect loans, he noted.
The Basic Transportation program is an alternative to indirect lending, Aranguiz offered. He’s not a big fan of this type of lending in part because credit unions often pay a fee to the dealerships they’re working with.
"Indirect lending–the problem is it doesn’t work properly. It’s not designed for credit unions," Aranguiz said. "You can really lose your shirt on it. A lot of credit unions took huge losses. Even in normal times, you’re likely to have three times more delinquencies."
He acknowledged that when interest rates are low, indirect lending has the propensity to be profitable. However, if rates start to rise, a credit union’s margin can easily be eaten up. Some are blinded by the amount of revenue brought in the first 12 months but then trouble sets in when the losses start to mount. Aranguiz has seen the fallout at other credit unions he’s worked at, and knew coming to Carolina Cooperative that it was not a path he wanted to go down.
The finance companies are no better, he pointed out. Aranguiz said many of them will charge 25% to 30% on vehicle loans and keep the keys in case there is repossession.
The $126 million Summit Credit Union in Greensboro, N.C., also works with Enterprise, calling its service the Credit Builder Auto Loan program. Since rolling out to members in October 2010, the cooperative is approving a dozen loans a month, said Sam White-hurst, president/CEO. A marketing campaign launched three months ago has helped pick up activity.
"We felt there was a need for it," Whitehurst said. "We have the cash to lend. We have the desire to lend and we’re doing a lot of good for people who need help."
Whitehurst said the credit union charges a "fair and reasonable interest rate" that helps pay for default insurance and collateral protection insurance. The rate allows Summit to take on additional risk without jeopardizing the credit union’s financials, he explained. Most of the members are subprime borrowers with credit scores ranging from 400 to 500. Summit has yet to incur any losses.
Since launching its program, Summit has had to make an adjustment with its marketing efforts. Whitehurst said they didn’t realize that members in the subprime category were not borrowing from the credit union. So when postcards went out to this group promoting auto loans, there was a little section on them that asked if they knew of family or friends who were having credit issues.
"We didn’t want to insult anyone by letting them know they were subprime," Whitehurst said. "We always try to qualify members for traditional financing first. The credit builder program is an option if they don’t qualify."
Summit has a diverse membership with 150 select employee groups, Whitehurst said. Some subprime members felt like they had limited choices such as settling for companies that charged rates north of 20%, he noticed.
"We have re-educated them by saying we have something to get them into basic transportation," Whitehurst said.