Long at odds, dealers and credit unions discover common ground with indirect loans
The Tulsa Teachers Credit Union in Oklahoma, for instance, started offering indirect auto loans through dealerships in April 2009. Indirect auto loans already account for 60 percent of the credit union's monthly auto loans, said Kristi Brooks Cohea, vice president of marketing.
"As you can see, it has been a very successful product switch for us," she says. The credit union also continues to offer direct loans.
Another lender, Texans Credit Union, in Richardson, Texas, has had a "solid, successful, and profitable indirect auto lending program" for about 15 years, says Jay Champion, chief lending officer.
He says the credit union wants to originate about $65 million in indirect auto loans this year and to increase the business in 2011.
Competing some, cooperating some
The typical credit union auto loan is still a direct loan. Since those are made directly to the consumer, there is no profit opportunity for dealerships because they don't arrange the loan.
In indirect lending -- where banks, captives and independent finance companies buy loans through dealerships -- the stores are paid a fee or a percentage of the loan.
It's also easier for dealerships to sell an aftermarket product, such as an extended service contract, when the dealership can add the cost to the vehicle finance contract.
However, the two auto loan categories are not mutually exclusive. About 20 percent of credit unions also do indirect lending and cut dealerships in on the profits, says Tony Boutelle, CEO of Credit Union Direct Corp., in Ontario, Calif., better known as CUDL, which provides online tools for credit unions.
Because the credit unions that offer indirect auto loans tend to be larger than average, indirect loans could make up as much as half of all auto loans made by credit unions, Boutelle says. CUDL says it does business with 780 credit unions and more than 6,000 dealerships.
Money to be made
Boutelle acknowledges that credit unions on average don't pay dealerships as well as other indirect lenders.
"Most credit unions pay a flat fee," he says. "They want to be able to offer the customer [at the dealership] the same exact loan as if they walked into a branch of the credit union, so they can't allow the dealers to mark it up."
He said CUDL tells its credit union customers they should pay dealerships that arrange loans a fee of at least 1 percent of the loan amount for a given loan - $200 on a $20,000, for instance. That's probably about half of what dealers can make on indirect loans arranged through banks or captives, but sometimes the difference is not so great, Boutelle says.
"The interest-rate markups are very thin at most institutions," direct or indirect, Boutelle says. "Consumers are smart."
You can reach Jim Henry at email@example.com.