Jump-Starting Auto Loans

Used-car lending at credit unions is hot.

October 20, 2011

Our cover story this month explains how used-car lending at credit unions is hot, while new-car lending certainly is not. We also look at some innovative strategies credit unions have come up with to pump up flat auto loan portfolios.

While banks are experiencing similar struggles, there are two prominent auto lending trends taking place behind banks’ doors: Subprime and indirect auto lending are enjoying a notable resurgence.

1. Subprime lending. Financing for both new and used vehicles to borrowers with credit scores of less than 680 was up 2.9% in the first quarter of 2011 from one year earlier.

That follows a 5.5% increase during the fourth quarter of 2010, according to Experian. Banks’ share of the sub-prime loan market has increased from 25.2% during last year’s fourth quarter to 26.4% in the first quarter of 2011.

Highlighting the increasing interest in subprime, General Motors (GM) created a captive finance unit this summer by buying the subprime lender AmeriCredit Corp., now known as GM Financial.

2. Indirect lending. After more than two years of declining auto sales, indirect lending is regaining some momentum. Many banks that exited this market in 2008 are getting back into this high-margin segment of consumer lending.

And don’t overlook the captive finance companies associated with car manufacturers. The captives have regained more than 50% of the new-car finance market after dropping to about 45% in 2009.

Credit unions aren’t sitting idly by. Their market share in indirect auto lending grew from about 10% three years ago to 17.5% last year, says Tony Bouttelle, president/CEO of Credit Union Direct Lending.

Credit unions’ price advantage should produce moderate, but not spectacular, auto loan growth this year and next. Credit unions enjoy a pricing advantage of about 150 basis points on both new- and used-car loans, according to Informa Research Services.