How to solve your indirect lending woes
Credit unions might be the biggest players in the indirect auto game. The overall margins on indirect auto loans have shrunk— one of the reasons why credit unions are still a major component in the industry. Credit unions are not-for-profit, which means they can make the rates very low to beat competitors down the street. This is all great but, at what cost? After speaking with hundreds of credit unions, we have found there are three major issues with indirect lending.
The first is the accounting issue if the loan pays off early. Second, on average, 25% of your indirect auto loan portfolio will payoff early. In other words, how do you stop the runoff? And third, you now have a member that often is not even aware they are a member of a credit union. How do you get the member to utilize more products offered by the credit union? In this article, we will share with you how the credit unions we have spoken to have solved these issues.
Issue One: Accounting
In order to solve the first issue, we needed to research what was happening at the credit union level. CU RateReset conducted a survey in partnership with the Credit Union National Association (CUNA) –we’ll reference it throughout this article.
The study found out that many organizations amortize the dealer fee over the life of the loan. If this loan pays off early or is refinanced within your own institution, you will be hit with that dealer fee. On average this will happen to over 25% of your indirect auto loan portfolio. We believe in order to solve this first issue with indirect lending, credit unions need a solution that effectively mitigates this account issue.
We’ve found that the best solution is a loan modification. However, many institutions have a manual modification process that is clunky and time-consuming for the member and back office staff. Reset Auto on the KNOCK KNOCK Platform at CU RateReset is a fully automated loan mod solution. There are very minimal back office resources needed to implement Reset Auto and it eliminates the dealer fee accounting issue.
Issue Two: Stop Runoff
The second issue with indirect lending can also be associated with direct lending. With indirect and direct lending, runoff will occur but, how are you stopping it? Big data tells us that auto loan consumers will refinance their auto loans between months 18 and 32. Looking at our own data with our credit union clients, we have found that members will refi their loans between months 20 and 30. These members are not buying a new car they are refinancing with a big refi shop or a competitor down the street.
The best way to beat runoff is to be both proactive and reactive. Get ahead of competitors with a digitally-frictionless way to extend the term of the loan to lower the member’s monthly payment, before your competitors can beat you to the punch. When you receive a payoff, can you get an offer to that member in less than 60 seconds? If the answer is no, then it’s very likely that the loan will be lost to another lender. Sending a Reset Auto offer not only retains that loan, but also increases the total yield and extends the term adding additional benefits to a portfolio with low margins to begin with.
Issue Three: Indirect Membership Awareness
Did you know that over half of all credit unions have an indirect lending program? And over 90% of credit unions with $500 million in assets have indirect lending programs. We can confidently say that many credit unions are working to solve this “mere” member issue. We’ve heard the solution to this problem referred to as “a magical, illusive unicorn.” Credit unions across the board have struggled to find the solution, and no one has been able to develop an answer that facilitates a multi-level relationship with the indirect member, until now.
Before I dive into the case study about a credit union who solved this issue, allow me to list a few more stats: Only 6% of all indirect members begin using two or more products within the first year; less than 14% of credit unions offer incentives or special pre-approved offers to indirect members, however, 74% of credit unions offer personal loan offers and 69% offer credit card offers to their members.
Clearly, the products are there for the members to benefit from, but why are so few taking advantage of them? We have found that it has to do with how and when the product offers are delivered. In the new, digital age of banking, members are looking for electronic offers, not another piece of paper for the recycling bin. A member-centric focus on a digital experience is key when it comes to engaging the member on multiple levels.
A credit union in Washington state figured this out. They offered their indirect members a Reset Auto opportunity. The straight-forward, digitized simplicity of the offer showed their indirect members how easy Reset Auto makes it to lower monthly auto payments. From start-to-finish, members complete the Reset auto process in less than 60 seconds. That “wow” experience becomes multi-level member engagement with a pre-approval credit card offer through the KNOCK KNOCK platform where there is no-application process, the member chooses their credit limit and transfers a balance all in less than 90 seconds. We tracked the success of this method and found that over 75% of the members who opened the offer also accepted the credit card. The magical unicorn has been found.
Reset Auto through the KNOCK KNOCK platform offers the solution to three major issues credit unions and their members face. By providing an opportunity to refinance auto loans in a streamlined, digitally-frictionless environment, members save and credit unions mitigate member runoff.
The KNOCK KNOCK platform also allows credit unions to more effectively engage their indirect members by providing credit card offers and more using the same easy, paperless process. CU RateReset is committed to working to provide these services to streamline your credit union’s operation and save your members time and money. To learn more about the Auto Reset on the KNOCK KNOCK platform, contact me at fkelly@ratereset.com.
