As a proportion of US auto lending, credit unions now control the highest share of the overall market. According to Experian’s 2022 third quarter report on auto financing, this is due to the typically lower interest rates credit unions currently offer compared to banks and captive lenders. The report showed that for auto lending, credit unions increased their market share from 22.8 to 30.7 percent from the same period in 2021. While captives dominated the new car lending market with 44.2 percent of the market, credit unions’ share of the used car market rose to 31.5 percent in 2022, up from 25.5 percent the previous year. Considering both direct and indirect lending, credit unions have increased their share of auto loans by nearly 80 percent since 2021, when they controlled just 17 percent of the market.
In the Wall Street Journal’s evaluation of the report, the average interest rate charged by credit unions for used vehicles was 5.94 percent, whereas banks were charging 8.36 percent. With the rising cost of both new and used vehicles, these lower auto loan interest rates will continue to give credit unions an advantage over other lenders for the foreseeable future. To increase their proportion of the auto lending market, however, it would be advantageous for credit unions to increase their indirect lending. Credit unions can then better contend with larger competitors by using managed services and embracing new lending technology.
The Basics of Direct & Indirect Lending for Credit Unions
When a credit union originates an auto loan directly to one of its members or a future member, this is what’s known as direct lending. Credit unions making indirect auto loans can benefit, however, from relationships with a dealership or other third parties. Even if the profit margin is smaller, when well-managed, credit unions can increase their profits from interest via indirect lending. However, credit unions must monitor indirect auto loans more closely, as the tighter profit margins make them more vulnerable than a direct loan to its members.
Differences between direct and indirect auto lending include:
- With indirect lending, credit unions must share profits with a third party rather than keep all profits themselves, as is the case with direct auto loans.
- Indirect financing tends to move the decisioning process forward more quickly, whereas direct loans are more time-consuming for the borrower as the borrower has to do more research to get the best terms.
- Direct lending offers greater profit margins for the credit union, whereas indirect auto lending provides potentially greater volume.
- Direct financing offers greater flexibility over loan types available, with applications made either before or after visiting a dealership.
- Direct auto lending focuses on the amount a borrower can afford, whereas indirect auto lending may limit vehicle options due to the dealer’s profit.
To develop relationships between auto dealerships or other third parties for indirect lending, credit unions should look at steps they can take to improve the process.
4 Steps to Improve Indirect Auto Lending for Credit Unions
Since auto dealers are the typical partners involved in indirect lending, credit unions should look closely at how they can benefit from relationships with specific dealerships. As it’s convenient for borrowers to obtain financing directly through a dealership, this offers credit unions a new and more dependable income stream. By improving their indirect lending, credit unions can more easily expand their market without noticeably increasing risk.
- Evaluating Risk Tolerance for Indirect Lending
The best way to create a mutually beneficial relationship with dealerships is by first evaluating the risk working with them may present. In a partnership regarding indirect lending, credit unions need to better understand a dealer’s business and their core clientele to get a sense of how to handle the dealer’s customers best. Starting a conversation with those in charge of financing at a dealership will help stakeholders understand the risks involved and whether these risks are worth taking. A credit union and dealership partnership makes sense if the strategies match up on any deal involving indirect lending.
- Indirect Lending: Credit Unions Tailoring Technology to Dealers’ Needs
Utilizing modern lending software allows credit unions to evaluate a dealer’s market focus and tailor their services to meet the needs of a dealer’s customers. Today’s technologically-savvy car buyers will be drawn to those lenders who offer a means to easily access their services. Thus, offering a means for customers to communicate via smartphones and other mobile devices will help seal the deal. This aspect of a consumer’s experience should also be tailored so that the dealer’s negotiations focus on what will best suit a borrower, allowing for repricing and restructuring of deals. Technology can benefit the dealer as well if the borrower already has dealt previously with a dealer, they have access to account information that can speed up the origination process.
- Make Loan Applications Easy to Submit
By integrating the auto lender’s and dealership’s technology, the application process is made easier for borrowers who choose a deal involving indirect lending. Credit unions can thus make loan submissions more efficient, while information like price, make, and model of vehicle will be automatically included in a loan application. This saves time, allowing for more applications to be considered and thus increasing volume. Such integrations also make it easy to capture and pass on any documentation necessary for the application process, like a photo ID, pay stubs, or proof of residence. This can be combined with e-signatures and e-contracts, which can be completed online, speeding the entire origination process.
- Responding Quickly With Decisions
The speed at which any lender responds with a decision is perhaps the most important factor for both direct and indirect lending. Credit unions should remove any roadblocks that take up critical time that can prevent a sale from being made. Speeding the time it takes a dealership to tell a car buyer that their auto loan has been approved will result in greater borrower satisfaction and will additionally increase a credit union’s loan portfolio. To make this process quicker and friendlier for applicants, online auto applications should be available, which became more prevalent when the COVID pandemic made in-person contact problematic.
Today, the vast majority of auto loan applicants want at least part of the process to be available online. To speed the decisioning process in indirect lending, credit unions should also take advantage of the automation available through various auto lending platforms. Many of these automated processes bypass the need for underwriter intervention during the decisioning process.
Decision speed can be enhanced through:
- Verification services that reduce risk from fraud and other factors for both dealers and credit unions, automatically confirming or questioning information supplied by an applicant.
- Auto-structuring features that modify terms and rates to match a credit union’s current lending policies.
- E-contracts and e-signatures allow credit unions to quickly review relevant data, along with confirming receipt of and accepting loan terms.
When it comes to indirect lending, credit unions that can respond quickly to requests from dealers will have an edge over their competitors.
Managed Services: Indirect Lending for Credit Unions
When it comes to choosing a partner that can assist with indirect lending, credit unions should engage a partner like defi SOLUTIONS to provide technological solutions and managed services that support both their direct and indirect lending. Credit unions can benefit from defi’s decades of experience and cutting-edge auto lending platform that both anticipates and delivers the benefits their customers require. By engaging outsourcing services for both direct and indirect lending, credit unions can improve their processes while expanding their operations through automation solutions that both reduce expenses and increase profits.
By using defi MANAGED SERVICING for indirect lending, credit unions gain access to:
- Capabilities that can easily and quickly bring new products or services to market.
- Comprehensive back-office support for direct and indirect auto lending.
- Expert teams that can immediately step in without the need for product training.
- Processes and solutions that can be configured to meet a credit union’s needs.
- Seasoned white-label customer service representatives.
With defi MANAGED SERVICING, credit unions can expand their direct and indirect lending and leasing services. With technology like chatbots that feature conversational artificial intelligence, credit unions can give customers a complete digital experience while also offering them the chance to speak with a human representative. When it comes to indirect lending, credit unions aren’t the only ones who can gain from such managed services. Banks, captives, online lenders, and other auto finance providers can benefit from an ongoing relationship with a seasoned third-party vendor like defi SOLUTIONS.
defi SOLUTIONS offers solutions for a lender’s complete loan or lease lifecycle, including both direct and indirect lending. Credit unions, captives, banks, and finance companies are all partnering with defi to utilize the company’s market-leading solutions that help lenders exceed borrower expectations. From digital engagement throughout the lending process, defi sets new standards for flexibility, configurability, and scalability in loan management systems, originations, servicing, and managed servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on defi MANAGED SERVICING, contact us today.