Products

Subprime Auto Loan Market Holds Promise

But be careful and don’t stray too far from your current membership base.

November 23, 2012
/ PRINT / ShareShare / Text Size +

An estimated 15% of U.S. consumers have FICO scores of less than 550 (a good FICO is 700), presenting a growing opportunity for credit unions in a subprime market that is expanding because of the recession, says Tony Boutelle, president/CEO of CU Direct Corp.

“To do it right, credit unions need to hire experienced people to work with them on entering the subprime market,” Boutelle says. “You can’t just transition from prime lending to subprime lending without setting up a different service and collections approach. It’s a unique and specialized market. Credit unions need to be very careful with it.”

Boutelle cites a recent Automotive News article on subprime lending that says the segment is growing rapidly. It reports that 15% of auto loans were made to subprime borrowers during the first half of 2012, and that the percentage is now estimated to be as high as 25%.

Joe Miller cites an interesting new twist to consumers’ traditional attitudes toward debt: Many will default on a mortgage before they’ll default on an auto loan.

This has surprised many big lenders, says Miller, director of customer service at AutoIMS.

“Keeping a job becomes the most important thing for people whose mortgages are underwater. They need a car to get to work. A mortgage might take six months to foreclose on while an auto can be repossessed within 30 days,” says Miller.

Boutelle notes many credit unions believe their members’ top priority is being able to get to their jobs. Besides, it’s easier to pay $400 per month on a car loan than it is to pay $4,000 on an underwater mortgage.

“Credit unions are getting more aggressive about making auto loans to their current members regardless of their home loan status,” he says. “Low interest rates, a willingness to take risks, and lots of available cash combine to make the market attractive. They’re also betting that the catastrophic things that can kill subprime lending, such as an economic meltdown, are much less likely to occur within the foreseeable future.”

Also, many people have low FICO scores solely because of the housing market collapse. “They’re good risks otherwise,” Boutelle says.

Still, to enter the subprime market, credit unions must take service to a whole new level, says Miller.

“That means lots of phone calls, monitoring, and follow-up. It’s more of an art than a science: Are you dealing with somebody you trust to pay you back and who may become a member for life—or are you opening yourself to a liability?”

A credit union, for example, might wait up to 30 days to contact a 700 FICO borrower who’s late on a loan payment.

“But a 600 FICO borrower is somebody you should call within five days of a missed payment,” Boutelle says. “Better yet, call before the payment is due to remind the member or, best of all, set up automatic payments.”

He cautions credit unions to make subprime loans only to members with whom they’re familiar.

“Your relationship with them increases the likelihood that they’ll pay you back. But when you pick up subprime borrowers, say from a dealer, you don’t have a relationship with them. They’re less likely to pay back the loan.”

NEXT: How vendors help

Post a comment to this story

heroes

What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive