When Dave Prosser looks back at four years of offering nonprime auto loans at Freedom First Federal Credit Union in Roanoke, Va., one member stands out: the credit union’s first nonprime auto loan recipient.
The borrower was a single woman who was raising a young nephew on her own and had to rely on public transportation to get around, explains Prosser, senior vice president of community development at the $331 million asset credit union. That meant she could only work at jobs accessible by bus, even though many better-paying workplaces weren’t on a bus line.
Grocery shopping by bus was a struggle because she had to manage as many bags as she could carry with a five-year-old in tow. So she frequently resorted to buying food at exorbitant prices at a convenience store close to home, straining her limited budget.
Getting a loan to buy a car made her life easier, and by paying back the loan she began to build a solid credit history.
It’s a result Prosser has seen time and again among nonprime auto loan borrowers at his credit union. “We’ve had some people improve their credit ratings and go on to become homeowners,” he says.
Freedom First Federal is one of 14 credit unions participating in an 18-month pilot project launched in April 2014 by the National Credit Union Foundation (NCUF) in partnership with the Filene Research Institute.
Half of the participating credit unions have experience with nonprime auto lending, while the rest are new to it. Pilot participants will learn from each other while also demonstrating to other credit unions that nonprime auto lending can be a winning proposition for everyone involved.
Participants set their own definition of “nonprime,” such as credit scores below 640 or 620. Different credit unions also use different credit scoring systems.
For members, the big benefits are lower monthly payments and enormous interest savings. Without a credit union loan, nonprime borrowers would have to turn to high-cost predatory lenders or “buy here, pay here” car lots where auto dealers provide financing—typically at exorbitant interest rates.
“We know that the best nonprime rate you’ll find outside a credit union is about 18% today. At the worst, the rate can be in the high 20s or low 30s,” says Mark Lynch, field coach for NCUF’s Real Solutions program, which includes the nonprime lending pilot project. He notes that credit unions’ nonprime auto loan rates generally are in the 10% to 18% range depending on the local market.
Not only do nonprime vehicle loans benefit members, credit unions also stand to gain.
Among the pilot participants with experience with these loans, “in every single instance, they have found that despite higher administrative costs and higher delinquencies, these loans are substantially more profitable than other loans in their portfolio,” says Lois Kitsch, NCUF national program manager.
Nonprime auto lending is also a way to put the credit union mission into action, Kitsch says, by providing affordable financial services to those who need them most. “Credit unions that turn away from this type of lending are missing a tremendous opportunity to practice our philosophy.”
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