What is meant by a non-prime auto loan?
While lenders use different criteria and credit scores to differentiate prime from non-prime loans, generally those applicants with C credit and lower will be considered non-prime borrowers. Most lenders, including credit unions, are apt to charge higher interest rates for non-prime loans over prime because they carry higher delinquency and loss risk.
Who needs a non-prime auto loan?
Most American workers (88%) drive to work. Not owning a car is a barrier to economic mobility and decreases a person’s chance of improving job opportunities. Those with credit challenges are often forced to use predatory buy here/pay here auto lots, where they are more apt to be sold a poor quality car at a questionable price and interest rate, regardless of the buyer’s ability to repay. If the buyer misses even one payment, the car is repossessed.
Why should credit unions care?
Credit unions should want to make more auto loans, especially in the current slow-growth market environment. A survey showed that of the 8 million used cars sold to low and moderate income borrowers, credit unions financed only 5% of those vehicles, whereas sub-prime lenders financed 60%. If credit unions loaned to those members with FICO scores below 600, their market share would expand by 15%. If they made loans to members with no FICO scores, their market share would increase by 40%.
What can credit unions do?
Credit unions can use a risk-based pricing strategy, where the rate charged is based on the borrower’s credit risk, to make more loans to those with credit challenges. Credit unions that use this pricing strategy often find that even with higher servicing and loss expenses, their net spread is higher than those loans made to A credit members. Credit unions making non-prime auto loans generally use a “hard close” to educate the borrower about the importance of timely payments and provide borrowers with insurance for those events out of their control. Some credit unions are also using an auto disabler device that shuts the car down when the loan is delinquent. Some credit unions use an auto-buying service to help ensure the member is receiving a quality vehicle at a good price. These credit unions are finding ways to make more loans to credit-challenged consumers, yet building in safeguards to protect the credit union.
To learn more about what your credit union can do – download the REAL Solutions Non-Prime Auto Loan Toolkit or browse the “Who’s Doing It” tab above for specific case studies.
Encore Used Car Loan – City County CU of Fort Lauderdale » View details
City County Credit Union of Fort Lauderdale pre-approves members with credit scores between 500-599 with at least three positive trades for a used auto loan up to $20,000. The pre-approval letter only has value at an affiliated dealership with the credit union. Members assured a good quality vehicle at a good rate
2nd Chance Car Loan – Community Choice » View details
For those borrowers with credit scores between 550 and 599, Community Choice Credit Union will make the member an auto loan, providing the applicant agrees to have a PassTime auto disabler installed in the car. The device reminds borrowers when a payment is due and can prevent the car from starting when a payment is delinquent. Delinquency and losses have been minimal.
Trust Funding Auto Loans » View details
Unitus Community Credit Union owns an auto-buying service CUSO, Smartway Advisors, to help credit challenged borrowers who don’t qualify for traditional CU financing to purchase an affordable and reliable car. Smartway financial counselors help applicants develop a monthly budget to determine payment affordability; then help locate a vehicle and secure financing with Unitus.
- REAL Solutions Non-Prime Auto Loan Toolkit
- Research Report: Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Loans by William Myers, REAL Solutions® Field Coach and Senior Fellow, Aspen Institute. Report funded by The Annie E. Casey Foundation, 2008.
- Affordable Car Ownership Programs: Transporting Families Toward Financial Stability and Success – The Annie E. Casey Foundation
- High Cost or High Opportunity Cost? Transportation and Family Economic Success – Brooking Institution
- Car Financing for Low and Moderate Income Consumers – Aspen Institute
- Pursuit of the Dream: Cars & Jobs in America – The Annie E. Casey Foundation
- Used Car Comparison Worksheet – Enterprise Car Sales
- Used Car Test Drive Tip Sheet – Enterprise Car Sales
- Margin Analysis – Loan Worksheet