Eugene Foley – ‘Losing market share’

The recent spate of auto dealers offering 0 percent financing has both helped and hurt credit unions in the state when it comes to their sales, say industry insiders.

But the level of concern is clearly rising as the industry tries to ride out a season that’s been a particularly difficult one.

Reflective of the rising concern was a recent, informal Internet poll on the Credit Union National Association’s Web site asking members how they are competing with low auto financing rates. Nearly 50 percent of respondents said they changed their loan rates to compete with auto finance companies, while 36 percent offered refinancing packages.

More than 50 percent of those responding to the poll said they relied on educational efforts aimed at making consumers realize the true cost of 0 percent financing by encouraging them to read the fine print and sending out materials that compare, line by line, the costs involved.

It is certainly an issue that credit unions are concerned about, and there are a number of reasons. One is that I think it tends to skew and almost pervert the consumer’s thinking as to what a car loan actually ought to be and ought to cost, said Robert B. Kimmett, senior vice president of the Massachusetts Credit Union League.

To many consumers, the choice between 0 percent and 6 percent seems like a no-brainer.

In reality, I think anybody that’s familiar with this business understands that no one can lend money for no return. Zero percent interest is, in fact, fictional because there is a payment made up front to buy the rate down, he said.

Recently, a Federal District Court in Illinois ruled that automobile rebates were to be disclosed as a finance charge if the rebates were not available to consumers who took the 0 percent financing option. Under TILA [Truth in Lending Act], a finance charge includes all costs that result from the extension of credit, and that includes savings – like a rebate – that the customer foregoes by accepting the financing deal, said Jeffrey Bloch, assistant general counsel at CUNA.

Additionally, the association has filed a letter with the Federal Reserve Board’s Consumer Advisory Council recommending more disclosures to consumers pursuing low rate financing from automobile finance companies.

Many times auto trade-in values are reduced and final prices are non-negotiable when the 0 percent option is taken, according to Kimmett.

But while the decline is attributed to the recessionary economy and the proliferation of 0 percent financing promotions, new auto loan growth within the credit union industry this year is only 1.5 percent, compared to 14 percent growth last year, according to CUNA’s vice president of economics and statistics, Mike Schenk.

There’s been a huge slowdown in new auto loan growth, in part because of the 0 percent financing but even more because of economic slowdown and the drop in consumer confidence, said Schenk.

Even when factoring in the economic climate, the 0 percent financing has had a profound effect on credit unions, he said.

Locally, the interpretation of what impact the special financing has had is mixed.

Traditionally, credit unions, although we’ve been losing market share over the years to dealers, have relied very heavily upon car financing … So it’s kind of a bread and butter product for us, said Eugene Foley, president and chief executive officer of the Cambridge-based Harvard University Employees Credit Union.

Harvard’s new-car business has dropped 50 percent from last year’s numbers. I’m assuming it’s directly a result of the 0 percent financing the dealers are doing because it seems that [in] national statistics and local statistics car buying, in general, is up, he said.

The good news, however, is that loans for the purchase of used cars issued by Harvard University Employees Credit Union are up 40 percent over last year, Foley said.

‘Tough Business’
Leo A. MacNeil, senior vice president of marketing at the $800 million-asset Brockton Credit Union, attributes the increase in used car business at his institution to the increasing cost of new cars.

We have been strong in the used car market, which is traditional … Many people are turning to late-model used cars and financing those. Additionally, to offset any adverse effect of 0 percent financing, we made our used car rates more competitive for the 1997 to 2000 year models, he said.

Brockton also has strong affiliations with foreign car dealers, many of which are not offering the special financing packages.

There is a very strong loyalty of credit union members throughout the industry to continue to rely upon credit unions for financing of vehicles. So all of those brought about a result where we were not dramatically affected by the competition – the manufacturers. We’ve had a very good fourth quarter thus far, said MacNeil.

While the attractive financing by car dealers may get people in the door, it’s not always enough to make them buy, say credit union executives. That’s because of the fine print. The financing is only for the cream of the crop for borrowers and often isn’t offered on the most popular car models. Additionally, the lowest financing may only be available for three years, a short time period to repay an expensive car loan.

But at least one credit union isn’t attributing its decline in sales to the manufacturers’ special financing programs.

I’m not sure that I would agree that it’s necessarily their 0 percent financing that’s impacting us, said David A. L’Ecuyer, president and chief executive officer of Central One Federal Credit Union in Shrewsbury. Although auto sales have been brisk this year, L’Ecuyer said he’s seen an overall decline in the auto sales industry over the years.

Most credit union executives in the Bay State have been in the business long enough to have seen the 0 percent financing promotions come and go.

We’ve been dealing with the phenomenon for a number of years and we do deal with it fairly aggressively, said L’Ecuyer. At least once a year during times when auto dealers offer low rates, Central prepares newsletters outlining an alternative strategy for its customers: taking the manufacturer’s rebate and securing low-rate financing at the credit union.

Are we getting to everybody? Absolutely not. The dealerships do a good job of getting to people at the point of purchase, which is an emotional time for people. They just want to get the damn paperwork done, get in their new car and go. It’s a tough business to get your fair share, he said.

Although auto manufacturers have been offering such 0 percent financing deals for much longer than expected and Ford recently announced it would extend those terms through January, Kimmett suggests it can’t go on indefinitely. This is extremely expensive for the auto dealers and the auto manufactures to do, he said. But it is working. Cars are selling.

A lot of people put the blinders on, said L’Ecuyer. They don’t realize that by taking the time to do simple math, taking the rebate, for example, and financing at a still-low rate with the credit union can save them money, even $30 a month over the life of a loan can add up to a good sum of money, said L’Ecuyer.

This is obviously an issue that credit unions are very concerned about – people not understanding what they are getting into. Zero percent sounds sexy and gets them into the showroom, said Schenk.

Credit unions hold about 20 percent of the auto lending market and about 2 percent of the lease finance market. But according to Schenk, another trend may have emerged that masks the actual number of people seeking car loans from credit unions. Many people are getting home equity lines to purchase their cars and deducting the interest from taxes, he said.

Another idea that has been bandied about the credit union industry is placing a courtesy lean on the car borrower’s property so that the loan would be treated the same as a mortgage loan. The credit union, because they would really be mitigating their risk, would offer a rate that was significantly lower, said Foley, adding he hasn’t seen any real interest in this option from consumers as yet.

But the wait-and-see attitude is also popular. According to CUNA’s poll, 31 percent of credit unions said they made no changes to their auto lending programs as a result of the auto dealer financing promotions.

Credit Unions Battling Zero Percent Promotions

by Banker & Tradesman time to read: 6 min
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