With competition high and margins low, how can you tune up your auto lending program for additional growth, higher earnings, yet manage risk?
The mission of every auto lender is to make more loans, earn higher yields and minimize risk. Competition for low risk loans is fierce, interest margins are thin at best, and lenders are challenged with a market “pie” being divided into progressively smaller pieces as new players enter this mature lending market. In the face of board pressures to grow loan portfolios and earn acceptable yields, how can a credit union combat this increasing competition and compete effectively?
Credit unions are known for their traditionally conservative approach to underwriting, seeking the prime or near-prime borrower with high FICO scores who are stable and creditworthy. But these borrowers will seek the lowest interest rate options, and are prone to early payoff, thus requiring a repeat of the buying process for those lenders trying to maintain a viable portfolio. Often, lenders will succumb to pressure and lower interest rates or eliminate verifications to maintain market share. Unfortunately, this strategy eventually leads to lower yield and increased risk.
An alternate strategy is to “buy deeper,” but that comes with an inherent undesirable increase in risk of future delinquency and resulting charge-offs. Often, when borrower credit scores are lower, most credit unions turn down or counter offer over 50% of the consumer auto loan applications they receive, with little, if any of these applications ending up as closed loans. The result is a waste of time and resources. What most credit unions need is an effective way to expand their traditional “buy box,” mitigate risk, and earn higher yields. This is easier said than done.
Credit unions should take advantage of programs that are aimed at successfully converting “near-prime” applications into funded loans. Such programs include Open Lending’s Lenders Protection Program, which uses sophisticated analytics to help credit unions convert more loans, while mitigating potential risks by issuing high quality loan default insurance, one loan at a time.
John Flynn, CEO and founder of Open Lending tells us : “We have helped our credit union customers fund over $3B in auto loans, helping them serve more of their members most in need with reasonable interest rates, in a safe and responsible manner, while delivering 4-6 times the net ROA of prime auto loan portfolios.”