Inflation is killing family budgets. Groceries, utilities, insurance, gas, rent are all increasing. High car prices and interest rates are making it difficult to afford a newer vehicle for growing families.
Credit unions represent the bedrock of financial security for their community and members. So, with that People Helping People mission in mind, what can credit unions do to make vehicle loans more affordable for members?
Interest rates and loan terms are the primary tools credit unions and banks have at their disposal to help consumers get into a vehicle and loan payment they can afford.
- However, there is minimal control over interest rates as rates are driven by national and global economics.
- So, the primary option to achieve lower payments is to increase loan terms from 72 to 84, 96 or more months. But does that approach of extending loan terms to effect lower payments address the needs of all your members or does it just set them up for a potential “negative equity” problem down the road?
Extending loan terms is “fools gold” for those that aren’t expecting to hold on to their vehicle until the end of term. And the reasons are endless as to why consumers will not reach the end of their loan term. As a point of fact, this issue makes it obvious as to why the average payout time for auto loans on credit union books is typically only 27 to 33 months.
So, Ed, where are you going with this?
Well, you see, every Tom, Dick and Harry bank and credit union has the same boring amortizing loan and extends the loan term to reduce payments. But as a member-owned credit union, how do you differentiate to help your members and develop a competitive advantage in the dog-eat-dog auto loan world?
The solution is simple! Add a 2nd loan type to complement the ubiquitous boring amortizing loan. A new loan type that not only provides your competitive advantage while increasing revenue but also ensures repeat loan business and a better member experience. This new loan type is known as a Balloon Loan which matches the loan term to your members’ expected needs.
A Balloon Loan is similar to a lease but has many advantages including the fact that the vehicle is titled in the member’s name, giving members all the ownership benefits of selling, trading, refinancing, or simply walking away at the end of the loan term. Some additional benefits are no down payment being required and Balloon Loans are available for vehicles up to five-year-old.
With everyone wanting “lower payments”, Balloon Loans are an excellent addition to any credit union’s product mix giving members choices that fit each member’s financial, ownership and driving needs. They are even great for refinancing loans that are habitually past due as payments are often up to 40% lower than conventional loan payments.
I highly recommend that credit union executives learn more about Balloon Loans as it’s not rocket science and actually quite simple to acquire this lower payment competitive advantage. I’ve found a very good thought leader in the “lower auto payment” space to be Auto Financial Group, which provides a selection of free educational videos on their website.
Just like any new technology, product or service, educate yourself and seek partners that provide proven turnkey solutions that help you accomplish your goals.
Unless you’ve abandoned your People Helping People mission, you owe it to your credit union and members to provide solutions like Balloon Loans that improve the financial well-being of your members and community.
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