Low prices are one proven way to attract consumers, but for many businesses — including not-for-profit ones — there’s only so far you can limbo down on price before you fall. So when Neighborhood Credit Union ($313.6M, Dallas, TX) considered potential strategies to boost its own auto loan performance, it looked toward creating extra value in the product without harming profitability.
“Last year we really had a difficult time growing loans” says Carolyn Jordan, senior vice president of retail services and development. “There was, and still is, a lot of competition when it comes to rates, and price became the only thing people were using to differentiate their product.”
The credit union not only faced pressures on the rate front from dealers offering 0% financing, but also saw rates of less than 2% from competing financial players in the market. Throughout 2011, the credit union was able to gain a 10% boost in used autos originations, but also experienced around a 10% drop in the new auto balance sheet.
Neighborhood still continued to offer members a competitive rate, but knew that those deals others were relying on to drive business would not be sustainable as a long term-strategy.
“We had to figure out a way to add other value to our loan product and lessen that emphasis on price,” Jordan says.
In November 2011, the credit union partnered with two financial insurance and investments companies, San Antonio-based SWBC and Dallas-based EFG Companies, to offer members a Mpower Vehicle Protection Plan that would come bundled with its new and used auto loans. The impact since has been substantial.
“Year-to-date in the direct auto portfolio we’ve seen 9% balance sheet growth for new cars and 5% growth in used car,” says Mike Roark, senior vice president of lending and collections. “Everything we lost last year in new cars we’ve gained back already in the first seven months of the year.”
The protection plan includes tire and wheel coverage, powertrain coverage, and paintless dent protection for vehicles with less than 36,000 miles. It also provides members the ability to walk away from any direct auto loan if they experience a drastic loss of income in the first six months after purchase. All of these benefits are provided automatically as a complimentary package, with free coverage lasting between 3-6 months for each of the products. The features can also be purchased as an ongoing supplementary benefit and added on as part of the member’s monthly auto payment.
“These benefits were just the differentiator we needed,”Jordan says. “No one else is offering anything like this, and the benefits plus the rate make it the best auto loan in our market.” These extra services are currently being marketed on Neighborhood’s website, in the branches, and even advertised at Six Flags Over Texas as part of a partnership with the theme park.
“We also count on our people to up-sell during the actual application,” Roark says. If they decline the ongoing coverage, the initial free benefits provided could cost the credit union up to $200 per loan. But if the member is successfully upsold, the credit union makes an average profit of around $700 per loan.
That risk of taking a financial hit was front loaded in the initial rollout and the credit union has since fine-tuned the process of selling the complete package.
Members also have a six month window after the free benefits expire in which they can upgrade to full coverage. In all, the credit union currently converts about 50% of auto loans into the paid option.
If the member does lose their income and can’t pay, they face no damage to their credit score or to their ability to take out subsequent loans with the credit union. Delinquency rates and defaults are no higher than before the credit union added the benefit, says Roark. And in the case of the latter, the credit union’s partners manage the reselling of any reclaimed collateral.
With nothing to lose from the program, and a lot to gain, Neighborhood members are feeling some lingering tensions from the recession fade away, and becoming more confident in their ability to become engaged members and proud auto owners once more.