COLORADO SPRINGS, Colo.-One credit union is starting off 2009 with an attempt to grab share before other financials follow suit, slashing its 36-month auto loan rate to 2.99%.
The offer, which Air Academy FCU expects will be in place all year, provides a better alternative than placing funds in low-paying investment vehicles and will help offset mortgage loan portfolio repricing as members rush to refinance, said Keith Kauffeld, VP of operations at the $390-million CU. "We are just trying to get ahead of the market because we think many more credit unions will move to these low auto loan rates soon."
Kauffeld doesn't think it will take credit unions long to increase their interest in auto loans, or any consumer loan, after the recent Fed rate cut. "Normally, you almost consider writing a consumer loan a member service," Kauffeld suggested. "Right now, in this low-rate environment, you are writing a consumer loan purely from the standpoint that it's the right thing to do financially."
Kauffeld suggested that in 2009 Air Academy might be happy simply to "have a positive bottom line. We recognize that, for example, if we have $20 million in mortgage loans we expect to reprice, and say we were earning 5% on that and our investment options are near 1%, that's a 4% difference. On $20 million that would mean $800,000. So whatever we made last year we can almost take $800,000 off the top, unless we can get it out there in some other higher-earning products."
AAFCU's loan-to-share ratio is 70%, with approximately $90 million in auto loans and $160 million in mortgage business. Kauffeld said the credit union wants to push that ratio higher, and the 2.99% auto loan will also boost mortgage business, as well, he predicted. When member service representatives call members to promote the low car rate, they'll also discuss refinancing.
"It gives us the foot in the door to talk about mortgage loans," Kauffeld said. "We know that members are going to be bombarded with opportunities to refinance."
The 2.99% rate is offered to "tier 1" borrowers, good refinance targets, Kauffeld said. "The rate and term appeals to the very stable borrowers who are in good financial positions. If they don't take a mortgage loan with us now and they take the car loan, when they are ready to refinance they are more likely to think about the credit union because they have a car loan with us."
AAFCU, which has risk-based pricing, dropped its 36-month auto rate a full point with the new offer-making it lower than the "Invest In America" rate being offered by Midwestern CUs that serve the auto industry. It currently charges 3.49% for 48 months, 3.99% for 56 months, and 5.49% for 78 months to top borrowers. Kauffeld said the CU is considering offering 2.99% for 48 months depending on the success of the current deal.
Kauffeld said AAFCU is not planning to drop deposit rates to offset lower loan rates and views the 2.99% car loan as an alternative to investment options. And due to the short term, even if rates move up, Kauffeld is not concerned about negatively affecting its ALM model. At press time AAFCU paid 2.85% APY for a six-month CD and 3.05% APY for one year. It also emphasized its high-yield checking account.
"We grew from $305 million in assets to $390 million last year, much of that due to the high-yield checking," Kauffeld pointed out. Air Academy's premium checking pays 4.06% APY, and has provided a solid revenue stream thanks to interchange and ODP income. "If someone can earn 4% on anything in the market, it's attractive. I think people will race to these accounts."
