Americans in their teens, 20s, and early 30s were a driving force behind the rise of the sharing economy a new crop of consumer behaviors and business models that offer lower costs than outright ownership.
Yet for some, this mentality was not so much a choice as a reality imposed by the effects of the recession including unemployment and underemployment that hit this demographic disproportionally hard.
Now, fueled by a slightly steadier job market and the natural progression of needs that come with growing up, many millennials are finally ready to step into auto ownership.
According to a 2014 J.D. Power study, Gen Y buyers surpassed the purchase activity of Gen X for the first time ever. So far this year, they account for 26% of vehicles sold. This brings millennials closer to the top buyer demographic, boomers, who make up approximately 38% of buyers.
Although young Americans are moving more in line with historical auto norms, their first forays into these purchases driven by independent research, peer referrals, and a desire for convenience are distinct enough to warrant their own strategy.
Here are three must-haves for any first-time auto buyer program. The features and incentives spotlighted are designed to sway this mercurial demographic off the fence and into an affordable loan product.
Next: Use All Available Indicators Of Character
1. Use All Available Indicators Of Character
A lack of credit score and the drought of affordable financing options that come with it is a self-perpetuating barricade for young borrowers, which is why many first-time auto buyer programs now take into account other factors.
Most typically require steady employment for a set time frame like six to 12 months and offer lower loan limits that help borrowers from overleveraging themselves with a vehicle they cannot afford.
CU QUICK FACTS
DADE COUNTY FEDERAL Credit Union
data as of 06.30.14
- HQ: Miami, FL
- ASSETS: $609M
- MEMBERS: 93,989
- BRANCHES: 14
- 12-MO SHARE GROWTH: 3.88%
- 12-MO LOAN GROWTH: 9.90%
- ROA: 0.92%
But there are other lifestyle indicators to consider as well. For example, at Dade County Federal Credit Union($609M, Miami, FL), both high school and college students receive a slight rate reduction on their first-time auto loans when they maintain a GPA of 3.0 or higher.
Credit unions that learn more about the hiring standards, turnover rates, and salaries of their select employee groups (SEGs) might use SEG employment itself as an additional indicator of borrower trustworthiness.
Next: Provide A Give And Take
2. Provide A Give And Take
Many institutions already require non-traditional or first-time homebuyers to participate in some form of financial education, so why not extend that to the auto space?
That’s the philosophy at Directions Credit Union ($600M, Toledo, OH), which allows direct auto loan applicants between the ages of 18 and 24 to complete a brief online tutorial from Trinity Debt Management in return for a 0.25% discount off of their approved rate.
CU QUICK FACTS
DIRECTIONS Credit Union
data as of 06.30.14
- HQ: Toledo, OH
- ASSETS: $600M
- MEMBERS: 70,371
- BRANCHES: 18
- 12-MO SHARE GROWTH: 4.43%
- 12-MO LOAN GROWTH: 3.68%
- ROA: 0.44%
We launched our first-time auto loan in late 2007 with a big emphasis on education, says Brenda Covrett, the credit union’s vice president of growth and development. Soon after, our success there prompted us to incorporate this product into an even larger youth initiative. We now have an entire suite of products broken into categories by age that we call MyLife.
Young auto buyers who have a credit score receive a rate that coincides with the credit union’s pricing structure. Borrowers who do not have a credit history receive a rate of 7.49%, says Tim Crosby, the credit union’s vice president of loan development. The education discount puts these borrowers at roughly the same price point as those in the credit union’s low B to high C credit tiers.
Since its inception, the MyLife program has generated in excess of $4.5 million in auto loans, nearly 80% of which have gone to new members, Crosby says. And while losses for MyLife loans typically hover close to 4% compared to 0.5% in the overall auto portfolio, the product’s other benefits more than make up for this calculated risk.
Our periods of stronger first-time auto growth normally coincide with significant upticks in our Gen Y membership growth, Covrett explains.
In addition, these borrowers have displayed a penchant for holistic relationships. They have higher-than-average penetration rates in key metrics like checking accounts, credit cards, and services per household.
Driven by these positive results, the credit union expanded the first-time buyer program, minus the online education component, to its indirect business line in 2012.
Next: Be A Bigger Part Of The Buying Process
3. Be A Bigger Part Of The Buying Process
A new generation of third-party websites have migrated large swaths of in-person dealership interactions such as research, feature customization, price negotiation, and financing into the self-service space.
Although many demographics have embraced this shift, young adults are at the forefront of it. In fact, a full 95% of millennials research and shop for vehicles online, according to a 2014 AutoTrader study, compared to 79% of the general population.
CU QUICK FACTS
TRULIANT FEDERAL Credit Union
data as of 12.31.14
- HQ: Winston-Salem, NC
- ASSETS: $1.8B
- MEMBERS: 186,983
- BRANCHES: 25
- 12-MO SHARE GROWTH: 4.45%
- 12-MO LOAN GROWTH: 5.38%
- ROA: 0.68%
Several credit unions have already partnered with third parties such a TrueCar to accommodate this trend and provide an organic next step for the financing of vehicles. Other credit unions are creating their own all-inclusive buying services that span both the real world and the digital one.
For example, Truliant Federal Credit Union ($1.8B, Winston-Salem, NC) offers its Credit Union Auto Buying Service to online shoppers of all ages. The service includes research tools, the ability to browse inventory, a way to apply for direct financing, an automatic 0.25% loan rate reduction for vehicles bought through the site, and even auto delivery options.
Expanding this flow of online research, shopping, and financing activity to mobile is the last piece of the puzzle. A full 50% of millennials in the AutoTrader survey listed mobile devices as their weapon of choice for the first two of those activities; however, only 37% of credit union respondents in Callahan Associates’ 2014 Technology Priorities Survey reported the ability to accept consumer loan apps via mobile. This goes to show there’s still plenty of work to be done to move mobile-minded members from interested browser to approved borrower.