Credit unions are making a big push into the auto financing market, with CU Direct, a network of over 1,000 credit unions, rising to the third-largest source of car and truck loans, trailing only JP Morgan Chase and Ally, according to Auto Count.
CU Direct expects a 17.7% rise in auto sales for the last four months of 2016, adding that it expects to add more market share than the one-in-four auto loans it's captured so far this year.
Part of the reason for the growth in credit union market share is the increased use of technology to woo buyers, especially younger ones.
"How we use technology is a factor in our success," notes Joe Pendergast, assistant vice president of consumer lending at Navy Federal Credit Union. "In 2015, we implemented electronic signature for personal loans. We're also leveraging the latest in mobile technology. In May, 2016, we made it possible for members to apply for a signature loan via a mobile device, and by year end, they will also be able to do the same when applying for an auto loan."
Credit unions have some built-in advantages that give them a boost with auto buyers.
"Credit unions are non-profits and are not driven by the need to make money for their shareholders," says Rob Ashbaugh, senior risk management consultant at Sageworks, a Raleigh-Durham, N.C.-based financial services firm.
Ashbaugh notes that credit union members pay fees, plus the "income" that credit unions make is reinvested in the credit union in terms of lower rates. "There are credit unions that are as large or larger than community banks, and act just like a bank, but some are very small and specialized," he adds. " We will likely always have a need for alternatives to banks, and credit unions fill that void."
Other credit union professionals echo that sentiment, adding that when it comes down to brass tacks, it's hard to beat the industry's typical auto insurance loan rate.
"When it comes to auto loans, credit unions are often a no-brainer," says Erin Ellis, an accredited financial counselor at Philadelphia Federal Credit Union. "As a not-for-profit financial cooperative profits go back to the members. One way members profit is through low rates on loans which is why credit unions often offer the best rates."
Banks and other lenders might offer competitive rates on new car loans, but one thing that makes credit unions stand out are used car loan rates that can be as low as 1.99%, adds Ellis. "In this financial environment, many people are looking for a great rate for used cars-not the brand new vehicle that will quickly decline in value," she says.
The fact that some auto customers may be unhappy with their current loan provider may also work in a credit union's favor, based on an "industry disrupter" model, says one industry expert.
"The fact that so many consumers currently work with a financial services institution they don't trust has significant financial implications," explains Jeremy Bowler, senior vice president in the financial services division at Market Strategies International. (In a recent study, the company says 31% of consumers do business with a company they don't trust. See the data here.)
"That distrust creates greater opportunity for disruptive change, and with financial technology solutions rapidly emerging, this is a pool of consumers who are ripe for the picking," Bowler states. "Customers who don't trust their service providers represent a significant risk to the profitability of those businesses, whether through risk of attrition, added service expense or potentially as a brand saboteur."
Bowler says the MSI survey results reveal that the overwhelming majority of distrusters are significantly more likely to dissuade friends and colleagues from doing business with a company they use. "This is critical because personal recommendations are one of the most trusted information sources cited by consumers when shopping for a new bank, insurer or investment firm," he says.
Competition-wise, it's not like bigger banks are ceding any ground to credit unions. Bank of America, for example, offers a deal to clients with an auto loan interest rate discount of 0.25%, 0.35% or 0.50% -- depending on the client's in-bank rewards membership tier.
But with smaller credit unions swinging from the heels with lower auto loan rates, the big banks will have to up their game to keep those new car buyers in the fold.
And it won't be easy, not when the average auto rate for a four-year loan at most banks is over 4%, and credit unions are countering at, as Ellis says, around 1.99%.