As many of us enter peak strategic planning season, now is the time to assess our loan portfolios and field of membership to identify the greatest opportunities for growth and profitability. One key driver? The world of new and used auto loans.
Recent Q2 2016 trend reports indicate the space continues to be a strong source of loan growth for credit unions. In fact, the data reveals:
1. Credit Unions experienced the largest year-over-year growth of outstanding loan balances (Q2 2016 vs. Q2 2015)
2. Credit Unions gained used car loan financing, reaching 24.9 percent of all loans
3. Both 30- and 60-day delinquencies remain flat to previous year
One of the biggest trends highlighted in a new Experian report is the shift to used vehicles by customers with excellent credit, thanks in part to the wave of off-lease vehicles coming back into the market.
So what are the implications for your credit union?
Take a moment to consider your vehicle loan growth during the past two years – your results during a peak vehicle sales period. How did you perform versus your peers? Did you meet your expectations? Who did you lend to – prime, subprime? How are you positioned versus the competition? Now consider how you would feel if you were to lose even a part of that growth in 2017. Now is a good time to ask a few questions:
• How might a more competitive lending environment impact your goals and bottom-line next year?
• What if more non-traditional lenders took a share of your auto loans?
• What is your lending plan for riskier borrowers? Is any potential impact enough to start thinking about a “Plan B”?
• What is your Plan B?
Most credit unions, especially smaller credit unions of less than $100 million (which 74.1 percent of us are), had to work hard, during a “peak vehicle selling” period to have fair-to-middling earnings. Nobody believes competition for vehicle loans will be easier in 2017. Credit unions will find even more competition for vehicle loans from traditional and non-traditional sources including the buy here/pay here lenders.
Work smarter and have a “Plan B”
With it being strategic planning season, where we will be looking at environmental reviews and considering potential threats and opportunities, it’s a natural time to continue our loan growth conversations and consider viable Plan B’s.
Our team will be facilitating more than 30 strategic planning sessions, presenting in small, medium, and large credit unions, coast-to-coast. Here are some of the Plan B’s we will be discussing:
Utilize data to find more opportunities with existing members. Successful execution of this plan runs deeper than just counting on the member-facing staff to cross-sell loan recaptures as they see them (probably every other financial institution your members utilize will be doing this also). All credit unions should look deeper and seek professional guidance. Strategic partners like Experian help credit unions improve their ability to differentiate Members. They have unique data that can help you offer-up products that will resonate with the Member, through the channel they prefer to use. Specific to loan-recapture, the key is knowing you will save the Member interest or payment size. Experian’s auto loan tools bring you this so you to make firm offers of credit to the members you seek.
Use data to identify people who are most likely prepared to buy. Chances are your loan rates and terms are very similar to most of your competitors. Don’t forget the four “P’s” of marketing: price, promotion, product, and place. If your product and price are not unique in a very competitive market, consider improving the “place” and “promotion” components for success. One way to do this is to have your promotion ready and waiting when the consumer makes the decision to buy. This could include using data to identify potential clues that one of your members will soon be in the market to buy. Be the first to recognize this and respond, and you may have a better chance at winning the business. Experian has developed models specifically for this purpose, identifying the likelihood the Member is “in the market” for specific products. These tools can help reduce marketing costs and improve performance.
Increase your focus to other loan pools. Outstanding credit card debt has increased since 2011, with the average household carrying $16,048. Now may be a good time to dust off a credit card balance transfer program focused on revolving debt consumers. Expansion into other loan products brings your credit union the benefit of a more diverse loan portfolio.
Lend deeper for near-prime and subprime vehicle loans. In today’s competitive market, prime credit consumers nearly walk on water. Picking up some new business is more likely to come in the near- and subprime space. Like any other loan type in your book of business, there are associated risks, but there are also tools out there to help lenders select the right loans, then monitor and manage the risk. Sure, delinquencies will be a little higher, but so will your loan yield and fee income. If your shop is a small fish in a very big pond, you have to look to the subprime market for future growth. Beyond traditional risk scores, Experian can bring you additional pieces of data that can indicate risk to the low and sub-prime market, and help you manage risk. This includes non-traditional risk scores that draw on data beyond the typical credit file, as well as credit bureau attributes that indicate payment stress or recent balance and utilization spikes.
Why it matters
The strategic decisions you make now will determine your results during 2017 and beyond. Consider all of your options, and select carefully. Commit, but remember that you should always have a “Plan B” – especially at a time of tough and increasing competition.
We get to work with so many credit unions we consider best practices for loan growth, deployment, yield, efficiency, and net margin. There is one important thing these best-practice credit unions have in common: they are relentless at investigating a better way, always measuring their environment and adapting quickly as needed.