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The Great Shrinking Auto Loan Margin

As auto lending competition continues to increase and interest rates decrease, it’s more important than ever for financial institutions to find innovative ways to increase their profit margins.

It’s no secret that auto loan competition is steep; we talk about this often because we realize howimportant auto lending is to so many of our clients. With the number of financial institutions, buy here, pay here car lots, insurance companies, and online retailers, credit unions are often forced to find creative ways to keep their current borrowers and attract new ones.

Often times, this comes in the form of lower rates. And when rates continue to drop, not only does it become more difficult to compete for the pool of borrowers, but returns shrink on the loans that are closed, causing a decrease in interest income and revenue. In fact, according to the2014NADADatareport, auto dealers sold 16.43 million units that year but only experienced a profit margin of 2.2%.

What’s The Driving Force Behind Declining Rates?

As mentioned above, the increase in competition has driven down rates, but there are several other factors in the rate decline. Consumers have gotten more savvy, and now have online resources such as Edmunds.com and Autotrader.com that arm them with information such as invoice prices and comparable pricing for vehicles in their region so that they can negotiate for the price and rate that they want. In addition, consumers aren’t afraid to shop around to find the deal they want.

Alternative Ways To Boost Revenue

With auto interest income being a key business component, and the market simply not being conducive to it at the moment, credit unions have to find alternative ways to generate income while still serving their members. Point of sale and insurance products go hand-in-hand. Think of it this way: would you buy ice cream at one store and then drive across town to another store to buy cones? Probably not, so why make your members do this when it comes to purchasing valuable vehicle protection products?

Vehicle protection products can sometimes have a bad reputation, particularly in the dealership F&I office where the price is marked up significantly, up to $800 for a GAP policy according toEdmunds. The fact of the matter is, a GAP policy can be critical in protecting borrowers from the inevitable depreciation that accompanies automobile ownership, particularly those borrowers with low or no down payment. And when purchased from the credit union, they can get a much more competitive price on the policy, making the auto loan more valuable, and ultimately building trust and loyalty with members.

Like most forms of insurance, you don’t realize how important it is until you have to use it. If borrowers gets into an accident, the last thing they want to add to the stress and worry of the situation is the frustration and disappointment of learning they still owe money on a vehicle that they can no longer drive. Vehicle protection policies can help prevent this, and in some cases, put your borrower back into a vehicle, financed by their trusted credit union.

As the credit union protects members’ vehicle investment, it also will inevitably boost revenue, helping to fill thegapof the interest income lost to shrinking margins. GAP with PowerBuy allows the credit union to provide members with a vehicle protection product that can not only pay off the balance of their auto loan in the event of a total loss, but give them funds to finance their next vehicle with their credit union, too.

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This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
August 3, 2015

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