CU Auto Lending Is Strong Despite Weak Car Sales

CU360
February 5, 2009 | COMMENTS

The auto industry looks bleak, from Big Three production facilities right down to most local showrooms. With consumer confidence plummeting and spending way down, lenders are also affected. Credit unions, however, are one of the few bright lights.

Despite plenty of bargains, "consumers are understandably reluctant to plunge into a big-ticket purchase right now," Greg McBride, senior financial analyst at Bankrate.com, tells The New York Times.

And prospective car buyers may find that the game has changed. Many lenders are tightening standards, and customers with a so-so credit history will pay more for a loan. Those with poor ratings will find themselves shut out. Loan lengths are getting shorter and amounts are getting smaller, and even the best customers could be required to make a larger down payment.

While banks are tightening lending standards and are not as willing to lend because of the subprime crisis and recession, that's not true of credit unions. "Credit unions didn't have the losses, and they don't need to hoard credit," says Steve Rick, CUNA senior economist.

Members are borrowing to finance used vehicles rather than new ones, according to Rick. For the 12-month period October 2007 through October 2008, credit union used auto lending increased 6.4%. During the same period one year earlier, used vehicle lending had risen only 1.3%.

Consumers who are unsure of their credit scores need to prepare before visiting showrooms, said Tom Quinn, vice president at the scoring division of Fair Isaac. He recommends that anyone shopping obtain a credit report first and understand the FICO score. People with scores of 700 and above are considered prime loan prospects. These folks are able to obtain loans without a problem, according to Art Spinella of CNW Marketing Research. Customers who are near prime, with scores of 600 to 700, can find loans with less attractive terms. But subprime customers, those with scores below 550, aren't getting loans this fall, he said.

"Consumers have to bring more than a smile to the table," Bankrate's McBride tells the Times . "You need a down payment. It doesn't matter how great your credit is." The average down payment this year is $3,100--roughly 10% of the vehicle price.

GMAC Financial Services stopped lending this fall to those with scores below 700. The company is increasing the interest rate it charges and decreasing the length of its contracts from 72 months to 60.

Meanwhile, Toyota Financial Services is upbeat about their prospects. The firm reports expanded lending, an active leasing program, and an approval rate on prime customers of over 90%. In contrast, industry approval rates this fall are about 60%, down from about 80% last fall.

Automakers are likely to continue using incentives to clear inventory well into next year, according to Jesse Toprak, senior analyst with auto research firm Edmunds.com. The industry average for incentives in September was $2,901 per vehicle sold, versus $2,357 last year.

Incentives vary widely, however, depending on the vehicle. Trucks and SUV's offer the best deals, but consumers shopping for fuel-efficient cars can also get a discount. Cash rebates have increased as well, to $1,613 in September, from $1,312 a year earlier, according to Edmunds.

Credit unions are stepping into the auto-finance gap, striking deals with U.S. auto makers to provide loans for cars and trucks sold at discounted prices through the "Invest in America " auto loan partnership. Anchored by institutions in the Midwest , credit unions from a dozen states have agreed over the past two weeks to make $22 billion in loans available to members to finance purchases of any vehicle.

Chrysler has agreed to give discounts of $500 to $1,000 to credit-union members in 12 states in the Midwest , South and Southwest. Previously, General Motors Corp. had agreed to a similar deal, offering "supplier" discounts of roughly 5% plus $250 off the price of GM. Ford Motor Co. isn't in talks on a similar deal, as it believes its finance arm, Ford Financial, can meet buyers' needs.