Embrace Subprime Borrowers
Serving C, D, and E members boosts loans and income, and helps those who need it most.
Razor-thin margins on A-paper auto loans and the growing number of consumers with impaired credit records mean credit unions should look closely at entering into the subprime arena, a lending consultant told attendees of the CUNA Lending Council Conference in Miami.
Credit unions are “stabbing each other in the back” with low-rate auto loans aimed at top-tier members, says Brett Christensen, owner of CU Lending Advice and former vice president of lending and sales at Clark County Credit Union in Las Vegas.
He cites a credit union client that recently made a $20,000 car loan with a 30-month term and a 1.3% interest rate—and stands to make only $341 in interest. “They’re giving away money.”
In contrast, another client recently made a $16,000 auto loan with a 72-month term at a 15.9% interest rate. The credit-impaired member will pay $9,000 in interest—and get out from under a 22.9% rate at a bank.
“You have to do the math at some point,” says Christensen, who believes credit unions should embrace C-, D-, E-tiered members—not only to grow loans and income, but to serve a greater swath of members.
“These members have the greatest need and the fewest options,” he says. “And if you help D and E-paper members, they will be very loyal. Can the same be said of A-paper members?”
In addition, an aging population will force credit unions to “buy deeper into the pie” to maintain loan growth, Christensen says, and aggressive dealer financing will cause credit unions to lose auto loans from the most creditworthy members.
“And,” he adds, “you can actually make money on D- and E-paper auto loans.”
Certain rules apply, however, when lending to members with damaged credit. They include: