Stay the Course in Auto Lending

Mike McLean
January 21, 2009 | COMMENTS

As automakers try to entice consumers with low- and no-interest financing on new vehicles amid a slow economy and rising fuel prices, some small banks appear to be backing away from the auto-loan market, while credit unions and some larger banks still participate in the fray.

The general slowdown in the auto industry, rather than automaker incentives, has had the greatest impact on auto-loan volumes, at least at Spokane Teachers Credit Union. “We're not losing a lot of business because of 3.9% financing,” Garrity says. “The bigger issue is the overall automotive industry,” Patrick Garrity, the credit union's director of consumer lending, tells the Spokane Journal of Business. About 15% the credit union's loan portfolio is in auto loans, he says.

Meanwhile, auto lending no longer is an emphasis at Inland Northwest Bank, according to Randy Fewel, the Spokane-based bank's president and CEO. “Over the years, auto financing represents less of our business,” Fewel says. “My guess is that 15 to 20 years ago, car loans might have been 20% of our business. Today, it's about 2%."

Don Webster, business manager at a local car dealership in Spokane, says that despite auto manufacturers' incentives on some models, most car financing is handled through the dealership's online national lender networks, such as DealerTrack and Credit Union Direct Lending (CUDL). Such networks have become the dominant lending conduits in the last two years, he says.

“We're handling 70% to 80% of the financing through them,” Webster says, referring to the dealership. He says the lender networks offer financing that typically matches or beats loan rates that car buyers can find on their own through banks and credit unions. Through the online systems, borrowers with good credit can have loans approved electronically in seconds.

In the current down market, most manufacturers who offer such incentives have put them on large SUVs and full-size pickups, which aren't selling well because gas prices are so high. Even with the incentives, market values for trade-ins have dropped so much that the incentives haven't sparked sales as they did when such financing was offered in 2006. Buyers are more interested in higher-gas-mileage vehicles, which are selling comparatively well without interest-rate incentives.

Spokane Teachers' Garrity says the credit union, which isn't a member of the CUDL network, was experiencing steady growth in auto loans until last spring. “Then auto finance overall slowed down,” he says, adding that the slowdown continued through the first four months of this year. “The last couple of months it has picked up,” Garrity says. “Consumer spending has been better than what most had expected.”

He has noticed that some people are taking out loans so they can switch to more fuel-efficient vehicles. “We're definitely hearing our members asking us if we know of dealerships with more economy-type vehicles,” Garrity says. The credit union offers auto loans with financing as low as 5.74% for up to 84 months, he says.

The credit union also offers discounts to auto buyers who make their loan payments electronically, and for those who have credit union credit cards.

Lower-interest manufacturer financing might not be the best deal, depending on restrictions that can come with it, Garrity contends. “In general, you give up rebates to get the best financing rates offered by the manufacturer,” he says. Given a choice, rebates are sometimes worth more than the savings on low-interest loans, he contends. “That's something we encourage them to compare,” he says. “The rebate could be enough that they come out ahead taking the rebate and a higher-interest loan.”

Auto financing isn't just for new cars, Garrity says, adding, “We do more financing for used than new.” The credit union encourages its members to arrange pre-approved financing before they visit car dealerships. “If they choose financing at the dealerships, we're OK with that,” Garrity says. “Maybe they'll come to us before their next purchase.” Not everybody is going to qualify for the manufacturers' low-interest financing, he says. “Those who do qualify could get financing anywhere. That's why we tell them to compare.”

Ann Flannigan, vice president of public relations at Washington State Employees Credit Union, a member of CUDL for five years, says the credit union offers 72-month loans with rates as low as 4.99%.

Through CUDL, the credit union had a near-record month for car-loan volume in May, she says. She says members are choosing rebates and discounts over manufacturers' low-interest financing incentives. “Our members are choosing cash savings up front instead of small savings over time,” she says. “They need a deeper discount now.”

She says many members have joined the credit union through CUDL. “It's a significant factor in our membership growth,” Flannigan says.

Reprinted with permission of the Spokane Journal of Business.