Borrowers look to credit unions for the best rates on conventional loans but use competitors for alternative low-payment financing options that incorporate residual values.
According to Experian’s State of the Automotive Finance Market Report, 1 in 5 borrowers financing a new car use some form of residual-based financing. Your borrowers look to you for the best rates on conventional loans but are forced to captives and your competitors for alternative low-payment financing options that incorporate residual values.
If you’d like to recapture these loans to attract new members, it might be time to consider a lease program.
Here are three reasons why credit unions should offer this kind of financing.
Reason No. 1: Capture The Lease Market As Captive Lenders Pull Back
For most people looking to finance a vehicle, it’s all about making the monthly payment work within their budget.
Auto loan portfolios have traditionally helped credit unions grow because of the competitive rates credit unions usually offer. But with vehicle prices at all-time highs and rates rising, some borrowers might be forced to pull back. Or, as Automotive News reports in a recent article, “consumers are requesting ‘the longest term possible’ as a means of lowering their monthly payment.”
According to Experian, in the third quarter of 2022, one-fifth of all new-vehicle borrowers and one-tenth of all used-vehicle borrowers had 84-month terms. But as Sam D’Arc, chief operating officer of Zeigler Auto Group, says in the Automotive News article, “Ultimately, 84 months in no way serves the customer.”
Even though negative equity has not been an issue due to pandemic-induced vehicle shortages that increased values of used vehicles, the situation is bound to change with production ramping back up. Eventually, values will stabilize, which will likely hinder consumers’ ability to trade in that vehicle and pay off their loan balance.
Borrowers who turn to leasing instead of extending terms as a way to achieve a more affordable monthly payment are finding that many captive lenders are pulling back on lease options and incentives since demand for vehicles has been so high.
For credit unions focused on serving their members’ best financial interest, this is the right time to participate in and take advantage of this market opportunity with leasing, which allows credit unions to provide a low monthly payment alternative to their members.
Reason No. 2: Improve Yield In The Liquidity Crunch
The credit union industry is facing a challenge as it looks for ways to fund record loan demand and stares down a liquidity crunch. Auto loan portfolios have traditionally helped credit unions grow and attract new members, so pulling back could have negative consequences in the long term.
With a leasing program, however, credit unions can continue to offer an affordable vehicle financing option to members while earning higher yields than on a conventional loan.
Reason No. 3: Attract A Younger Generation Of Members
Credit unions are often looking for ways to attract younger generations and turn them into members. Offering products that appeal to younger borrowers, such as a leasing program, can be a great way to accomplish this goal.
Gen Z is already comfortable with the “pay for what you use” model popularized by music and video streaming services, and they enjoy the flexibility it provides to make changes as their taste and needs evolve. Leasing provides this kind of flexibility with shorter terms and more affordable monthly payments than conventional financing.
Other Benefits To Leasing Programs
In addition to the current environment, which makes it a particularly good time to capture this market, there are additional benefits that make offering a lease program a good idea. They include:
- Your credit union will strengthen its relationships in the indirect channel.
- Your credit union can differentiate itself in a crowded market.
- Your credit union will have higher yields because the loan amortizes to the residual value, producing higher average daily balances.
If you decide it’s time for your credit union to offer leasing, look for programs that offer additional benefits, such as making the program fully turn-key by managing the insurance tracking and monthly use tax reporting as well as the end-of-term process on behalf of your credit union.
Additionally, look for options that extend the lease program to used vehicles, often a large portion of a credit union’s auto loan portfolio. Most captive programs offer leasing only for new vehicles, so it serves as an additional differentiator.
Article author Tim Kelly is president of Auto Financial Group. He has more than 20 years of experience delivering solutions to financial institutions. Reach him at tkelly@autofinancialgroup.com. Auto Financial Group (AFG) is a Houston-based company that provides an online, residual-based, walk-away vehicle financing product called AFG Balloon Lending as well as vehicle leasing and vehicle remarketing to financial institutions across the United States. For more information about AFG call toll free at 877-354-4234 or visit autofinancialgroup.com. [https://www.autofinancialgroup.com/]
