- Affinity FCU predicts this will be a record year in auto lending, helped along by members refinancing leases, mostly from other financiers, into Affinity loans.
- The New Jersey cooperative also is reviving its own leasing business after posting a record year in its own overall auto portfolio.
As the prices for used cars soared in 2021, the lenders at Affinity Federal Credit Union ($3.8B, Basking Ridge, NJ) noticed an interesting trend: Consumers holding automobile leases started taking advantage of low interest rates and high market values to buy their vehicles outright.
To strike while the iron is hot, the New Jersey-based cooperative deployed three tactics:
- Pulling data on members who were paying car loans and leases to another lender and targeted them with marketing about Affinity rates.
- Offering pre-approvals on auto loans.
- Increasing indirect lending through AUTOPAY/RateGenius, the recently merged recapture financers that allow members to obtain lower rates and longer terms versus their existing loans.
That helped Affinity grow its business despite those pandemic-driven supply chain issues ; including chip shortages ; that have resulted in used car prices soaring and new car inventories collapsing.
Almost counterintuitively, Affinity just saw its highest year of auto loan production, says Kathleen Metz, senior vice president of lending at Affinity FCU. People held onto vehicles longer, refinanced existing loans to lower rates and longer terms, and bought out leases to take advantage of the higher value compared to the residual value. Most banks and other lenders will not do auto lease buyout financing, so this gives Affinity an advantage.
Back Into The Leasing Business
Most of Affinity’s lease buyout business is coming from leases that members hold elsewhere. Affinity itself only offered leasing from 2015 to 2019, and the last of those is set to end in 2023. The cooperative currently has approximately 360 leases worth roughly $8.45 million in an auto portfolio of about $490 million ; much of it originated as indirect loans ; and a total loan portfolio of nearly $3.1 billion.
But Affinity expects its leasing business to start growing quickly and soon.
“We’re re-entering auto leasing with Credit Union Leasing of America in May,” Metz says. “Because New Jersey, New York, and Connecticut are top leasing markets, we hope to do a significant amount of new business despite the ongoing inventory shortages”.
The Perfect Storm
Although leasing is not currently a big part of Affinity’s auto business, it certainly was before. According to Metz, “from 2016 to 2018, leases represented 40% of the cooperative’s auto portfolio booked units and 52% of its auto portfolio booked dollars.”
“This is more indicative of what the percent of our portfolio leasing was versus where it is at this moment,” says the veteran lender, who arrived at Affinity nearly nine years ago and has been in charge of all lending functions there since February 2020. “We hope to return to those levels now that we’re getting back into leasing.”
Affinity began tracking auto activity after noticing a change last August. “The data shows lease buyouts have hovered between 15% and 17% of all direct loans booked since then. Since we’re a large indirect lender, it’s a lower percentage of total loans,” says Metz.
“Lease buyouts are nothing new, but the level of them is,” she adds.
“The perfect storm of the new car inventory shortage, people driving their existing vehicles less due to working from home, and the higher value of used cars were all factors,” she says. “With a lease buyout, the original residual value is essentially the contracted purchase price and the cars are worth more than that purchase price, so it makes sense to buy the car you know right now than try to find a new one or even a used one.”
Affinity plans to accommodate members’ decisions to either buy out their old lease or write a new one for those committed to that new car feeling.
“Leasing vehicles is usually a member’s best option when they want a new car every few years or want a higher-end model than they can afford with a loan but can meet the mileage and care requirements of the lease,” Metz says.
According to the executive, that difference is usually about $100 a month.
And despite the fact it has been out of the leasing game, Affinity expects a warm reception from auto dealers.
“Dealers are excited to get back into business with us as they enjoyed our service and how quickly we process leases and pay them,” Metz says. “Plus, we priced the money factor competitively to get a strong start and have let them know we’ll hold the rates for a few months, adjusting as needed with the market after that.”
But that’s not the only thing that makes Affinity an attractive indirect partner.
“At present, captive finance companies are not offering incentives because of the low inventory, so dealers are looking for alternate sources to finance their vehicles,” Metz says.
The market remains fluid, and who knows what might happen down the road. Given that reality, Metz has some practical advice to other cooperatives thinking about leases.
“Monitor trends to make sure you’re doing what members need.”
4 Ways To Build A Fluid Auto Market
Kathleen Metz, SVP of lending at Affinity FCU, shares observations and best practices the credit union has gleaned from collaborating with members and dealers through the pandemic.
- “Watch the trends. It’s certainly been an interesting economics class since COVID hit, with classic supply-and-demand issues raising auto values, combined with fewer vehicles on miles because of people working at home.”
- “Be honest. Review members’ lease contracts with them so they understand the residual value is the purchase price. Dealers have been known to add to this amount and claim a new purchase price that’s not accurate.”
- “Understand the portfolio. We closely monitor auto values and the impact on our portfolio overall. We expect values will go down at some point, and we’ll need to watch how that impacts our book of business.”
- “Be crystal clear. Set expectations with dealers and communicate regularly to ensure they understand the program, which deals fit within it, and conditions you’ll require for doing business with your members.”