Indirect auto-lending currently is out pacing direct-to-member lending amongst US-based credit unions.
Banks hold almost double the market share for indirect loans over credit unions and auto loans in the U.S.
Learning the pros and cons of indirect vs direct loans can help your financial institution operate more effectively. It can also significantly increase revenue.
In this article, we will review the difference between direct vs indirect loans. Continue reading to learn what the best options are for your credit union.
Indirect vs Direct and What You Need to Know
Direct loans are loans that are originated directly from your credit union to your member or future member, the consumer. Indirect loans come through a car dealership or other venue that has your credit union as one of their network lender options.
Credit unions can benefit from relationships with third parties for indirect loans. While the extra income and asset growth are beneficial, it does require close monitoring due to tight margins.
Direct lending may have a bigger profit margin, but indirect lending gives you the ability to do more volume.
With increased fees from dealerships, profitability is often challenged because of reduced margins. There is a need for more monitoring because of quick rates of pay-offs, charge-offs, and inconsistencies in documentation.
If an indirect program is managed well, credit unions will be able to make money on interest collected. Any other fees and money earned goes to the dealership.
The Balancing Act
Since indirect lending is not as lucrative as direct lending, it is necessary to find the right balance for your credit union.
While getting loans indirectly might be an effective way to bring volume into your credit union, it isn’t the most profitable way if you had to choose between one or the other. Focusing on generating more direct auto loans from current and new members is the best use of resources. Depending on indirect auto loans for your income alone can be a rocky business.
Using a full-on attack method to target buyers in the market for a car, who are looking for low rates, isn’t the most effective way to market. If you advertise a low rate, you will get a lot of applications. While a lot of applications might seem like a good thing, it isn’t so great if most people that apply won’t get approved. Soft credit checks can help with this potential obstacle.
Use a Targeted Approach
To increase loan growth and profitability on each loan, make an effort to reach people in your target market. Marketing to people that are likely to want your product and likely to get approved will give you better results. Fewer applications will take fewer working hours, but the higher approval rate will bring in more business.
Credit bureau information can be used to craft an effective customized marketing plan. When you target a profitable audience segment, you can create a specific and easy to understand message that will get their attention.
Not only are you offering your potential new members a direct loan, but you also get a direct line of communication with qualified prospects. Having access to vetted prospects will allow your credit union to make the best of their time and resources.
Inability to communicate with members as a result of being an indirect lender creates a loss of opportunity. When there is a direct line of communication, the credit union can cross-sell or up-sell to the member. Single-service relationships usually end when the loan is paid.
Focus on Profitability
While high sales volume looks good when business comes in, you need to make big enough profits. If you aren’t making big enough profits, you are likely allocating your resources in the wrong areas.
Use data to drive your decisions, so you know you are moving your business in the right direction.
When you are working with your members directly, you increase your ability to re-target and market to them. Understanding your members and customizing how you communicate with them is one of the ways you can increase profitability.
Find out important information like:
- What is the average relationship length with one of your members?
- How many accounts do your members hold with your establishment?
- How do members use their accounts?
- What is the life cycle of your member loans?
Finding out small details like the information above will allow you to notice trends in data. Noticing trends in data will allow you to naturally help members with their decisions.
Your data might show that a certain member type often pairs one account type with another. If that type of person only has one account currently, you could promote the other account, so they know about its availability. Promotions that are this targeted often have a high conversion rate.
Developing a Persona
In the previous section, we talked about gathering information to market to a certain “type” of person. These types of people are called “personas” in marketing.
Analyze information and develop a persona so you can create products, services, and sales and marketing campaigns that serve the members. Your company will benefit from higher conversions. Developing a persona will also help you provide a better member experience for more word of mouth business.
Gather more information on the persona that you market to and you can continue to perfect your message, so you are speaking directly to their needs.
Make Doing Business Easy
As your credit union continues to build and grow, you may notice new and exciting challenges. The financial world is highly data-driven and requires cutting-edge technology to stay on top. Having technology that supports you in your mission to provide value to your members and profits to your business is vital.
Whether you choose to do indirect vs direct loans or you want to do a mix of both, you need a loan origination system that will make work easier.
Having a dependable and easy to use Loan Origination System shouldn’t be a luxury. Request a demo of our high performing LOS Platform today. See how we can support your credit union by helping you through today’s challenging lending environment.