Unbeatable Rates-And Now, Terms

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Over the past year credit unions have been battling the 0% APRs being offered by the auto manufacturers by stressing to members they're better off taking the rebate and financing through the credit union.

That's because in many cases the 0% and 2.9% APRs were available only on limited models and with short terms. But now the captive financing units have found ways to beat their own 0% financing deals by extending the terms and making more people eligible for rates that can't be beat.

And that's increasingly putting credit unions in the backseat when it comes to financing auto loans.

"There have been deals out there where a rebate isn't offered as an option. Honda, for example doesn't offer a rebate, " said Tony Boutelle, CEO of Credit Union Direct Lending, which offers indirect lending programs to credit unions. "Some are offering rebates that are so small that it makes it awfully tough to compete."

The shrinking rebates are coupled with a new carrot. Where a credit union had been able to get its foot in the door when the member realized how short the terms were on the 0%, 1.9% and 2.9% deals, the auto manufacturers have extended terms on those APRs out to 60 months in some cases.

As Kiplinger Personal Finance recently noted, "a surprising number of people" qualify for these 0% deals, with 75% to 80% of people applying for these loans being approved.

Even so, the 0% financing deals aren't unbeatable, says Boutelle.

"Education is still the way for credit unions to compete," Boutelle suggested. "In some cases, you've still got the rebate to work with, and that is still a compelling tool for credit unions to use. But even in those cases where there is no rebate or the rebate doesn't look like the way to go, one thing credit unions can point out is that they're not getting the full value of the 0% deal if they're having to give up the car in two or three years. They're not building up the equity in that car. In the long run, if they take the rebate and go with the credit union loan, they're going to have better equity in the car, and that means they'll get a better deal when they get rid of the car."

What has surprised many analysts is that the low-rate financing hasn't disappeared.

"I'd say it peaked in November and December, but what's happening now is that although some of the manufacturers said they were going to pull those offers, they didn't. They continued them, but GM, for example, didn't continue them on some of the higher-end brands, like Cadillac and Hummer," Boutelle related. "Credit unions have got to address it, because it doesn't look like it's going to go away. Indeed, the GM CEO has said it's not going away."

All that is leaving credit unions scratching their heads on remaining competitive.

"Some credit unions have gotten the ability from their boards to match certain rates, but even then, you have to set something you won't go below because it's where you start losing money," Boutelle noted. "Credit unions don't have a manufacturer behind them that can throw money over the wall. What you have to do is make it visual for members, show them why they should go with the credit union. If they haven't already, credit unions need to have calculators on their website that show members exactly what they're getting-or not getting. If you don't have those calculators, put a link on your website to a vendor who does have them."

And this is one arena where it's best to think locally, not globally. "Lending is pretty local, and sometimes a dealer will buy down the credit union rate," Boutelle advised. "They're going to get the same return and the dealer can market the low rate to the credit union."

Not surprisingly, the CEO of CUDL counseled that credit unions that wish to be successful in the auto loan market are going to have to get into indirect lending. "The credit unions that are most successful generally are doing it with a point-of-sale program. There are very few who succeed on a direct basis these days," he stated. "It's kind of sad, but if you don't have a point-of-sale program, you're probably not going to have good growth in your auto loan portfolio."

To back that statement, Boutelle pointed to J.D. Power & Associates research that shows dealers arrange the financing in 88% of new "luxury" cars and 81% of new "less luxury" cars. "And about 70% of used cars are financed at point of sale, too," he added. "Zero percent financing or no, credit unions have to make the lending transaction as efficient as possible."

But there is at least some good news to come out of the 0% financing debacle, Boutelle said.

"Yes, 0% has been a real challenge for credit unions, and it does hurt them because it does take some loans away," he commented. "But it did get people out there looking at cars. In a way, it has helped because it did get a lot of buyers out."

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