Credit unions nab bigger share of auto loans

Donna Harris  |   |  Automotive News / January 8, 2007 - 1:00 am

Credit unions are competing more aggressively with other lenders to form finance partnerships with auto dealerships, a new study concludes. Nearly 10 percent of new-vehicle loans arranged through dealerships last year were funded by credit unions, according to J.D. Power and Associates' 2006 Consumer Financing Satisfaction Study. That's up from 7 percent in 2005 and 3 percent in 2004, Power says. Credit unions long have competed with dealerships for auto finance business. The Power study suggests many credit unions now see the advantage of offering vehicle loans at the point of sale. The study notes that some join networks known as aggregators, which help dealerships gain access to credit union financing. Dealerships are warming up to credit unions because they provide competitive interest rates and generally offer longer-term loans, the study says. Those factors help dealerships woo buyers when interest rates are rising, Power says. "As the new-vehicle financing environment adjusts to increasing rates and compressed margins, credit unions are positioning themselves as strong competitors to the established captives, banks and independents," David Lo, senior research manager of automotive finance for J.D. Power, said in a press release. "From the dealer perspective, credit unions are currently competing primarily on their rates and terms." Credit unions also have a history of good service to retail customers, Lo says.     Head to head   How classes of vehicle lenders compared in 2006 on interest rates and loan terms AVERAGE AVERAGE APR* AVERAGE TERM Banks 6.80% 60.2 months Captives 5.30% 57.0 months Credit unions 5.70% 60.8 months *Annual percentage rate Source: J.D. Power and Associates, 2006 Consumer Financing Satisfaction Study   Lower rates, longer terms Last year, the average retail interest rate for a new-vehicle loan funded through a credit union was 5.7 percent, Lo told Automotive News. The comparable rate for banks was 6.8 percent and for captive finance companies 5.3 percent. The captives' rate reflects incentives such as 0 percent financing, Lo added. The average term for a credit union vehicle loan in 2006 was 60.8 months, the Power study says. That compares with 60.2 months for banks and 57.0 months for captives. Lo said captives still can offer dealerships more attractive finance reserves -- the profit that dealers make on loan rates. Captives also have the infrastructure and experience to give dealerships better service, he said. Indirect lenders, which fund loans through dealers, "have two customers: There is the dealer and there is the retail customer," Lo said. "That's new to the credit unions." Companies such as Credit Union Direct Corp. are making it easier for credit unions to work with dealerships. Credit Union Direct, of Rancho Cucamonga, Calif., offers an online point-of-sale network. It allows more than 8,000 dealerships to tap funding from 594 credit unions in 45 states. "Instead of each of those credit unions having to go out to dealers and sign their own dealer agreement, we contract with the dealers," says Jerry Neeman, senior vice president of Credit Union Direct. "It centralizes the whole process." The company helped fund $14.8 billion in auto loans in 2005, up from $2.1 billion in 2000. Neeman estimates that total reached $15.5 billion in 2006. Dealers less satisfied The J.D. Power study concludes that dealers' overall satisfaction with finance providers dropped last year, mostly because of rising interest rates. Other highlights from the finance study:   Ford Credit ranks highest in consumer lease satisfaction in the luxury and nonluxury segments.   General Motors Acceptance Corp. ranks highest in loan satisfaction in both segments.   Just 3 percent of customers said their finance or lease contract was transacted through electronic contracting last year. But those consumers generally expressed great satisfaction with the process.