Give First-Time Auto Buyers Some Credit

It’s a tough time to be shopping for a car, especially for those with little or no credit history. According to online car guide Edmunds, the cost of financing a new vehicle is at an all-time high. A full 17.1% of consumers who financed a vehicle in the second quarter of 2023 are making a monthly payment of $1,000 or more. Average monthly payments also reached a new record of $733 in the second quarter.

Between higher interest rates and higher car prices, consumers are feeling the pinch, but they still need reliable transportation. That’s where a new program at American 1 Credit Union ($590M, Jackson, MI) comes in. The credit union’s First-Time Auto Buyer program helps drivers purchase a car while at the same time building a bit of financial security.

“We saw an opportunity to help facilitate the lending journey of younger members in a responsible way,” says Chris Zegarlowicz, lending manager for American 1.

An Untapped Opportunity In Auto

The credit union launched the program at the end of 2022 after months of research and close collaboration between the marketing and lending teams. First Time Auto Buyer is still in that “soft launch” phase in that the credit union is identifying members who qualify and exploring the opportunity with them rather than marketing the new program broadly. Such an individualized process is helping the organization refine the program before kicking off more traditional marketing and promotion.

The inspiration behind the program, however, is ready to share.

American 1 created the program to serve “no score” applicants, those without a credit history. In lieu of a traditional credit score, members must meet other criteria — including six months of continuous employment, income verification, debt-to-income requirements, and loan-to-value restrictions. And if they qualify, the maximum loan a borrower can take out is $25,000.

“This is boldly generous when compared with other first-time buyer programs, which tend to be significantly lower and are often capped at $15,000,” Zegarlowicz says. “We want to put members in a vehicle they want to keep.”

Indeed, holding onto the vehicle and making on-time payments on the loan is one way a new borrower can build credit. American 1 also issues each borrower a companion credit card and provides pointers on how to build and use credit responsibly. Meanwhile, the extra buying power helps borrowers steer clear of old vehicles that can require costly or ongoing repairs.

Additionally, the cooperative offers a rate reduction after members make on-time payments for a year. That’s especially notable given the starting interest rate on an auto loan through this program is already competitively priced at 9.49%, compared with the 15% to 18% borrowers would pay if they did not qualify.

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Uncomplicated Yet Beneficial

To keep the program “uncomplicated,” Zegarlowicz says American 1 does not require borrowers to have a credit union checking account.

“We wanted to simplify the process and make this easy to digest for our members, which is especially important during our soft launch phase,” Zegarlowicz says.

Additionally, borrowers don’t need a co-signer — a traditional requirement for “no score” applicants — which empowers them to step out on their own.

“A lot of the feedback we’ve gotten from parents is relief when they learn their child can be responsible for their own purchase,” Zegarlowicz says.

So far, first-time auto buyers have predominantly fallen into the 18–22-year-old age range. However, these kinds of programs have the potential to impact a much broader demographic. For example, a gentleman in his 50s with no borrowing history and no credit score was able to take advantage of a similar program.

“We’re seeing not only those just entering adulthood but also those who haven’t established credit,” Zegarlowicz says.

Goals, Lessons, And Future Plans

American 1 didn’t set a specific dollar goal for the auto program. Instead, it views the program as another way to serve the underserved. A lack of knowledge can turn buying a car into a predatory experience if the borrower doesn’t have a trusted financial partner, so the credit union chalks up as a success each member who drives away having had a good experience.

Early on, American 1 learned it needed to effectively prepare for and track potential fraud.

“We dealt with some fraud initially, which our team was pretty quick to identify,” Zegarlowicz says.

Any new program, especially one that doesn’t require a credit file, poses new risks. That’s why Zegarlowicz advises other institutions to carefully plan how to track the program internally to enable timely course corrections.

Based on the amount of interest, the future looks bright for American 1’s First Time Auto Buyer program. It has the potential to not only make a significant impact on individual borrowers but also help a new generation learn to use credit responsibly.

“For us, it’s important to maintain contact with these borrowers,” Zegarlowicz says. “By continuing to have that conversation and reviewing their credit report with them after a year, it opens the door to additional insights and avenues to financial wellness.”

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— This originally appeared on  Aug. 7, 2023, on CreditUnions.com.