HAUPPAUGE, N.Y.-How low can they go?
That's a question credit unions are asking about auto loan rates, with the captive finance companies and banks driving down the numbers across the U.S.
Captives are back with 0% and banks have jumped in with rates below 3%, forcing credit unions to examine competitive responses, cost of funds, and ways to get more creative with pricing. Many CUs are also moving quickly to solidify dealer relationships.
There is a sense of urgency among some credit unions, as expectations for stronger CU auto loan business from a recovering economy have shifted more toward hope that volume will simply meet last year's levels. In numerous markets across the country, credit unions told Credit Union Journal that direct and indirect volumes at the start of the year are down from last year's activity.
In the Northeast, GrooveCar President David Jacobson is concerned with banks that are now "back with a vengeance. GrooveCar had a record year last year, but we understand the world is changing. Banks are becoming much more aggressive. We have seen 60-month rates as low as 2.9% fixed for A-plus credit."
Some credit unions that use GrooveCar, an online car-buying and leasing service, have lowered rates to 3.49% for 60 months on "A" credit, which Jacobson feels may be good enough to keep indirect business, since credit unions generally provide better dealer service than banks.
But the problem facing many credit unions on indirect business is cost of funds, pointed out Jacobson. "The dealerships are now making a lot of money off the banks. If the dealership buys money at 2.9% and lends it out at 4.9%, they make about $1,400 in commission in reserve. So if a credit union is at 4.9%, the dealer may make $300. We have so many things working against us now."
That means it's time for credit unions to get aggressive with pricing, according to Jacobson. "If they want the cream-of-the-crop credit they are going to have to step up."
In Ontario, Calif., Tony Boutelle, president of Credit Union Direct Lending (CUDL), confirmed that some bank rates are down to 2.9% for 36 months. "It's a challenge. We have 750 credit unions on our platform, and we are seeing a decent number being aggressive. But as a group we are not seeing the volume we saw last year at this time, and it's due to banks and captives coming back with very aggressive pricing."
Boutelle, along with a number of credit unions that spoke with Credit Union Journal, hope the moves by the captive finance companies and banks are only a temporary full-court press to win back some market share lost over the last two years, and believe the auto loan market will be more "realistic" by the end of the year.
The CUDL CEO said he has seen a number of its member credit unions drop to 3.75%, and a few to 3% for 36 months. "For the 60-month loan, the benchmark seems to be 3.75%," Boutelle said, adding that credit unions can only go "so low" and must keep their eye on net interest margin and cost of funds.
What may keep the pressure on, Boutelle acknowledged, are banks that received "cheap" government money and which continue to pay low deposit rates. "Credit union cost of funds are coming down. I think the average is 2.09%. But still quite a bit above the banks."
Mark Ziegler, SVP-lending at the $808-million MAX CU in Montgomery, Ala., is taking a hard look at net interest margin and whether the credit union needs to cut its 3.5% APR, 36-month A-paper rate. Ziegler is worried about captives' efforts that include 0% and 1.9%-with a rebate. "We may have to get more aggressive. If there is any rate lowering in the near term it will be minor, though, another 25, possibly 50, basis points. But we have not made the decision to do that."
Dana Rawlings, SVP and COO at Smart Financial CU in Houston, said his $410-million CU is not budging off 3.75% APR for 60 months. "You look at your cost of funds, operating expenses, and eventual charge-offs, and it makes it close to a break-even deal," said Rawlings, a member of the CUNA Lending Council. "It doesn't make any sense to go lower than that."
Pressure from the captive finance companies, including "strong-arming" dealers with threats to cut floor-plan discounts if the car sellers don't direct a high percentage of their loan volume their way, has the nation's largest CU indirect lender, Security Service FCU, prepared to "do what we need to do" to hold onto its share.
"If the competition is pressuring rates down, and we have room to move, we will," explained Charles Goss, VP-lending, declining to disclose how much lower the $5.5-billion credit union will go.
For its best paper, the San Antonio-based SSFCU charged 4.05% for 60 months at press time. Goss suggested, though, that the credit union may not have to move a great deal on rate, and that it will not provide additional incentives to dealers, based on its track record of superior service and maintaining consistent lending practices, especially during the recession. "Our indirect model has worked well for us in the past and it will continue to do so."
But some changes need to be made to keep direct and indirect business, acknowledged the $8.6-billion BECU, which recently began a new equity rate program to drop its price to 3.74% APR for up to 84 months. The rate is for 80% loan-to-value based on Kelley wholesale price. "It's the first time we have offered this," said Debbie Tarbuck, indirect lending manager for the Tukwila, Wash.-based BECU. "It's going to be an interesting year."
