How To Boost Auto Lending To Young Borrowers

Credit unions can build long-term loyalty by helping consumers with their first big financial commitment.

Successfully reaching and engaging a younger demographic requires building a network of support, awareness, and outreach that these individuals can grow up with over time. More often than not, their first major financial commitment will be an auto loan. Here, credit unions share four techniques to get an in with future car buyers now, and set the stage for real business down the line.

Go To Where The Gen Y Workers Are

A select employee group(SEG) remains a primary option for reaching new members, but some industries trend younger demographically. Top employers of young adults include the armed forces, retail giants such as Walmart and Target, and the United Parcel Service, according to Forbes Inc.

A younger SEG was one driving factor for the turnaround at Darden Employees Federal Credit Union ($28.8M, Orlando, FL). Previously branded as Multi-Media Federal Credit Union, this credit union served the struggling media industry in central Florida until 2009, when it began an ambitious rebranding and service expansion in partnership with Darden Restaurants, who employ roughly 200,000 young servers, cooks, and restaurant managers across the nation.

Prior to the partnership, the credit union’s average member age was in the mid-40s, says Jim Kasch, CEO of Darden Employees. Today, the average is in the mid-30s and falling fast.

An influx of young, lower-income members may not be ideal for some financial institutions, but Darden Employees has been able to secure both safe and profitable financial relationships with these individuals just as they enter their prime auto buying years.

Be Willing To Start Earlier

According to the Credit Union National Association, the average age of a credit union member is 47 a full decade older than the median age for the nation. And although many credit unions are intent on reaching the 18-to-25 age demographic, few have a game plan for the roughly 24% of Americans who currently are younger than 18.

The majority of first time auto buyers at Arlington Community Federal Credit Union ($203M, Arlington, VA) are in the 18-to-26-year-old demographic, but the credit union reaches out to these potential buyers much earlier, even offering seminars to high school students as a part of National Credit Union Youth Week.

Topics for these sessions include how to find a vehicle the borrower can afford, how to use and understand CARFAX reports, and various tips for conducting online research and handling price negotiations. Arlington Community also works with its dealer partners to bring real vehicles to school campuses for students to examine.

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As of third quarter 2012, auto loan penetration at Arlington Communitywas 24.47%, compared with a peer average of just 15.65%, according to Callahan & Associates’ industry data. Auto loans to members age 18 to 25 totaled roughly $1.2 million between 2011 and 2012.

Be Willing To Work Harder

Because its new member base consists of primarily lower-income, younger workers, the credit quality of potential borrowers at Darden Employees is not premium, but it’s not all subprime either. Still, the credit union is making loans in smaller-than-average amounts.

We don’t have $25,000 to $30,000 car loans we’re doing it at $11,000 each, Kasch says. We have to do two loans for every one loan a typical credit union would do.

Despite smaller dollar amounts, total auto loan volume at Darden Employees has increased 104% as of the third quarter, including 34.4% growth in new auto loans and 118.5% growth in used auto loans.

To achieve this growth, the credit union runs SEG employees through a prescreening process that eliminates anyone with a bankruptcy, D or E paper borrowers, and those who have a vehicle loan in delinquency or have had repossession. In a three-month period the credit union typically checks the credit ratings of about 65,000 people, and of those, Experian returns roughly 18,000 prequalified candidates. The approval rate on these auto loans, even with the prescreening process, hovers around 40%.

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Match The Mentality Of Your Desired Membership

In knowing who your members are,you want to make sure you think about the products and services you’re going to offer, says Tonya Voltolina, chief financial officer at Darden Employees. You need to not be afraid of change and to let go of the way you were doing things before.

In some cases, credit unions may even need to be willing to expand their lending to niche areas they may have never considered before. For example, Unitus Community Credit Union ($934M, Portland, OR) expanded its auto roster with a Green Loan program, which offers a 0.25% rate reduction on hybrid vehicles for four years.

According to a 2012 Deloitte Gen Y survey, 57% of young, potential buyers would prefer a hybrid vehicle, compared with 37% who prefer standard, gasoline-powered options. Adjusting to these changing buyer preferences will be critical for institutions that want to secure a bigger piece of tomorrow’s auto loan business.

June 3, 2014

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