The fundamentals of growing indirect lending in any market
For lenders looking to grow their auto programs in 2023, there are a number of challenges to overcome, including higher rates, inflationary pressures, and ongoing supply chain issues. Learning about the fundamentals behind running an indirect lending program and having a plan in place to implement them is more important than ever.
In this post, we cover some of the key fundamentals of growing an indirect lending program. Those three fundamentals include: financials, efficiency, and flexibility.
The Financial Fundamentals
Great relationships with dealers are the foundation that indirect auto lending programs are built on. But even great relationship-building won’t increase loan volume if your financial fundamentals aren’t strong.
Your base rates must be reasonable to balance risk and yield effectively. That means pricing for all prime loans, not just A-paper. Your dealer comp and advance levels must also be reasonable.
Consistency is important, especially when rates go higher. Once you are in the indirect lending market, it’s essential to be there for your dealership partners who need to rely on you year after year, especially when it comes to underwriting. Credit unions have the ability to effectively control their underwriting and rates.
Credit unions can and must differentiate themselves in 2023. The big banks can be good lending partners in positive economic times; however, they typically pull back when times get tough. Credit unions that offer a consistent lending experience can maintain healthy partnerships with dealers and position themselves for future success and the opportunity to expand their market presence. Last year, credit unions actually surpassed banks for the first time to gain the top share in auto lending.
Fundamentals of Efficiency
What dealers want more than anything is fast funding. That’s why inefficient decisioning and funding can quickly sour a strong dealer-lender relationship. Dealerships are under pressure to close deals quickly and fairly. Today’s modern consumer has come to expect that large parts of the buying journey can happen online, and credit unions need to adapt.
Credit unions use automated decisioning for about 25% of auto loan applications. Compare that to banks and fintechs, which often use automated decisioning 100% of the time. Clearly, credit unions have an opportunity to gain some ground.
Is 100% automation necessary to grow loans and effectively compete? No. In today’s increasingly competitive marketplace, efficient loan funding is critical — not simply reaching 100% automation. Credit unions that use automated decisioning for 60% of loan applications can increase auto loans and market share without increasing risk. To quickly reach that number, automate easy approvals and hard-pass declines to save the loan officer’s judgment calls for nonconforming loans.
Efficient loan funding is also a must when it comes to building and maintaining dealer relationships. Credit unions can increase funding turnaround by making the process easier for dealers, streamlining procedures, and eliminating information and steps that aren’t needed.
Like auto dealerships, credit unions serve a wide variety of needs – and the unique needs of their local markets. To be successful lending partners, credit unions must cater to these needs like they do when serving their own members. Credit unions can jumpstart this partnership flexibility by clearly communicating their expectations to the dealers they choose to work with.
Credit unions should carefully build their indirect loan portfolios, focusing on key measures like aggregate risk, yield, and concentration. Credit unions that take this approach and work with their dealer partners to ensure they are providing the right kind of paper for a well-balanced portfolio are in a better position to stretch to meet the dealer’s needs when asked. That shared effort toward both organizations’ goals is a relationship dynamic dealers can’t get from banks, finance companies, or even their own captive lender.