When it comes to buying a car, many members of Communicating Arts Credit Union face choices limited to buy-here-pay-here lots with some rates as high as 20% or more.
Hank Hubbard, president/CEO of the $33 million community development credit union in Detroit, is hoping a new program will offer a fresh alternative through its “Auto Bailout” promotion.
Reliable transportation may be taken for granted in other parts of the country. In Detroit, not having access to a vehicle can lead to a host of other problems.
“Public transportation is not very reliable or widespread. People need cars so they can get to work. Unfortunately, they get into what I think are predatory loan situations with really high rates,” Hubbard said.
Thanks to a $1.5 million grant from the Community Development Financial Institution Fund, CACU will be able to cut the interest rate on an auto loan in half or more or extend the credit union’s rate–whichever is lowest.
For example, if a member is paying a 24% annual percentage rate on a five-year, $20,000 vehicle loan, the loan payment would be $575.36 with $14,521.56 in interest. With an Auto Bailout loan, the member could refinance to a 12% APR for the same term and end up with a $444.89 monthly payments and $6,693.34 in interest. The total savings would be $130.47 per month and $7,828.22 in interest over the life of the loan.
So far, 20 loans have been approved since the program that began Jan. 1, Hubbard said. CACU’s goal is to do 100 loans or until the grant funds run out.
Meanwhile, the auto industry has struggled to recover over the past few years. According to Southfield, Mich.-based auto research firm Polk & Co., between 2008 and 2011 Americans bought a record 10 million fewer cars than they would have if the economy had been stronger.
Hubbard said the impact has especially been felt in Detroit where some people are locked in to high cost deals for five to six years without realizing they can change that. Most people have an opportunity to refinance and don't realize it. During the most recent recession, it's been tough for buyers with average credit to get an affordable auto loan, he said. Some auto industry critics have said credit requirements were too strict for too long, making it hard for borrowers to buy a new car or truck.
CACU estimates that if it helps 100 people with the grant funds, it can help rate-locked members save a total of $15,000 each a month.
Eighty percent of CACU’s 8,600 member base has subprime credit, Hubbard said. It’s a reality that the credit union doesn’t shy away from. Rather, solutions are shown to help bolster low credit scores and build strong payment histories.
“We do loans to D and E paper all the time. We do underwrite them,” Hubbard said. “Our delinquency and charge-off rates are higher than our peers. The kinds of loans we make would make other credit unions freak out.”
But as a CDCU, developing the community that it serves is an ongoing mission, Hubbard said. For its efforts, the credit union was named Credit Union Times’ 2010 Trailblazer award winner for outstanding service to the underserved.
The buy-here-pay-here car lots have been successful in wooing shoppers who may not be aware that they have options, he added. Hubbard said they, along with new car dealers, are CACU’s biggest competitors.
To help, members are armed with information to make financing work in their favor. Hubbard said he’s heard shoppers say other lenders wouldn’t take their loan applications seriously. He recalled how one woman was paying a 19% rate on her existing car loan. When she came to CACU to refinance, she was surprised to learn that because of her high credit score, she qualified for a 3% rate. With a loan balance of $7,000, she saves $100 each month.
The credit union will also help members by sharing the value of a car to help avoid impulse buys, Hubbard said. If a member comes in underwater on a loan, it does not significantly affect the loan approval decision.
“We look at the amount of the loan and whether they can pay it back,” he explained. “The credit score is looked at to improve the deal.”
While CACU has used CDFI grants in the past, mostly for lending capital, Hubbard said this is the first time the credit union has launched a loan program that helps members cut auto loan rates. A new loan manager was brought on board last year to help oversee the new offering.
“It’s not uncommon for our members to find that they have car loans from 20% to 24%. We serve a low income, low wealth area of Detroit,” Hubbard said. “It’s probably one of the most devastating parts of the country. People feel like they don’t have any choices.”