How Indirect Lending Can Really Work
In 2014, U.S. consumers are expected to buy or lease 16.4 million new cars, according to the National Auto Dealers Association.
Add to that averages from years past showing that Americans buy nearly three times more used cars than new. Mix in a little economic recovery, a boost in consumer confidence, a dash of pent up demand and low interest rates on car loans and you’ve got a decent recipe for the case for credit unions to ramp up efforts in the auto loan department.
Since 1990, Security Service Federal Credit Union has grown its auto loan portfolio to more than $5.4 billion through a program that hinges on an indirect lending model that has been carefully designed to be profitable, scalable and replicable as we have expanded into other parts of Texas, Colorado and Utah.
The case for indirect lending
Indirect lending works because of the convenience it provides, which translates into sales for the dealer and income for the credit union. When members can show up at a dealership, choose their car, complete their loan application, get approved and walk out with keys in hands we’ve created a positive experience for both the member and dealer. Deal. Done.
At SSFCU, we believe in partnering with dealers to offer the best product at a competitive rate and ensuring the process is seamless, efficient and fast. This takes resources.
Being competitive with the captives only goes so far. We are passionate about nurturing long-term dealer relationships. We proved to them that we will support them because we are consistent and they can count on us to deliver every time. We listen more than we talk. We set clear expectations and meet them.
The case for members
According to research by J.D. Power and Associates, 87% of people buying cars finance auto loans at the dealership, with dealer recommendations as the most critical driver of lender choice. So while members can come into the branch for a loan, we would much prefer to serve them at the point of sale and make it convenient, efficient and easy. But there's more than that. Individuals who purchase a car with an indirect loan often don't consider themselves a credit union member. Their car loan may be the only relationship they have with the credit union. We believe that presents a world of opportunity for those who are willing to take that extra step to develop relationships with these new members.
So, we put it to the test in one market. We followed up, welcomed them and engaged them locally, asking how we could help, sharing products and services the credit union had to offer and explaining how we differ in philosophy from other financial institutions. The results were nearly one of every three members who received an indirect car loan during our test opened a checking account as result of our follow-up campaign. More importantly, we developed deeper relationships with them, many of whom told us they had not received service like that before from their financial institution. This campaign has now been rolled out enterprise-wide.
The case for the unknown
There are still many unknown factors that may impact credit unions’ success including the Consumer Finance Protection Bureau, new regulations and oversight to programs, including auto lending, unemployment rates, captives’ involvement, rebates and other tactics with dealers and market pressures caused by rates, inventories and competition.
Credit unions must consider other issues before taking on an indirect lending program. It must fit well into the business model. Before we entered the arena, we did extensive due diligence, creating a business plan with an intentional strategy to monitor risk and ensure sustainable success.
Charles Goss is executive vice president and chief lending officer for Security Service Federal Credit Union. He can be reached at 210-476-4908 or firstname.lastname@example.org