While the increasing costs of automobiles is forcing members to borrow over longer terms, one person is more concerned with the rates at which some credit unions are making loans.
Auto lending remains a core offering for credit unions even as gas prices push past $3 per gallon yet as Tony Boutelle, CEO of CU Direct Corporation, notes, "transportation is a must."
CU Direct administers the Credit Union Direct Lending (CUDL) program, which has grown to 580 participating credit unions and 7,800 auto dealerships in more than 40 U.S. states. Boutelle and Henry Wirz, chairman of the CU Direct board, told The Credit Union Journal they are seeing auto loans with much longer terms than were commonly seen 10-or even five-years ago.
Boutelle said CUs are more apt to take on car loans longer than 60 months because "they have a deeper relationship with their members" than other lenders do with their customers. In 2001, he said, the average auto loan was 54 months. Today, that figure is 61 months; and the average CUDL loan is 70 months.
"There are a lot of credit unions doing 66-month or 72-month loans, though not many 84-month loans," he observed. "The average size auto loan is larger because we are financing more expensive vehicles than banks. And banks are following. Banks have credit unions on their radar and see credit unions as competitors. Banks will go to dealers and tell them they will match credit union rates."
Chrysler: Friend Or Foe?
Among automakers, Chrysler is very interested in either competing with, or working with, CUs on auto lending, Boutelle added.
Wirz, who also serves as CEO of North Highlands, Calif.-based SAFE Credit Union, said his credit union's present standard auto loan is 66 months.
"In recent years, we've seen the terms go from the old standard of 36 or 48-months to 60, and we extended it to 66. Quite a few people are doing 72- or 84-month loans," he said. "It is a reflection of the price of automobiles, and the quality. They last longer, so people are driving them longer."
According to Wirz, the risk in auto lending today is not collateral or underwriting, it is pricing. He said he still sees CUs offering 4.99% auto loans, despite a Federal Funds rate at 5%.
"That's not rational and, over time, will be damaging to credit unions. Credit unions must reexamine the profitability of auto lending. They need to do the analysis and ensure they are making a reasonable return on these loans."
SAFE CU has an auto leasing program, but Wirz said it only offers leases through the auto broker service it co-owns with 12 other Sacramento, Calif.-area credit unions.
"The 84-month loan is almost like a lease in terms of monthly cost of ownership. That is why people lease-lower cost."
To Boutelle, leasing is something to avoid (for a different take on leasing, see related story page 12).
"If Bank of America and other big lenders are getting out of leasing, it probably is not a good sign credit unions could jump in and be successful," he declared.
Manufacturers Know Better
Manufacturers know better than anyone what a vehicle is worth, and have the capacity to take a loss on a lease, which gives them an advantage in this part of the market, Boutelle continued. He said leasing risk lies in the mystery of the value of the auto at the end of the lease term. "If the residual value is less than you can sell it for, you can take a loss."
Boutelle and Wirz said the "employee pricing" events automakers used last year to spur sales were successful, but also sapped some of the energy out of 2006 sales by moving purchases to 2005. Asked what credit unions can do to drive more auto loans in the second half of the year, Wirz said there aren't many specific initiatives available.
"The reason loans are down in our area is affordability. Gas prices are up, and a lot of people are seeing their adjustable-rate mortgages rising-family budgets are stretched," he said. "It is hard to take auto share away from others that have it. In Sacramento, credit unions have 34% of the market, and that has not declined. Over the last year, fewer cars are being sold, but we have the same percentage of a smaller number."
Boutelle said he does not see a problem.
"Things are not growing as fast as they were last year at this point, but there still is a lot of auto lending demand out there. From May to August last year, things went crazy. This year we have seen higher gas prices and higher interest rates, which have put people on the sideline."
"People will be pushed more into used cars, and credit unions own that market, so it might be a good thing," Boutelle added.