Changing landscape of AUTO LOANS

Journal of Business, Jul 24, 2008 by McLean, Mike

As automakers try to entice con­sumers with low- and no-interest financing on new vehicles amid a slow economy and rising fuel prices, some small banks appear to be backing away from the auto-loan market, while credit unions and some larger banks still participate in the fray, industry insiders say.

The general slowdown in the auto industry, rather than automaker incentives, has had the greatest impact on auto-loan volumes, at least at Spokane Teachers Credit Union, says Patrick Garrity, the credit union's director of consumer lending.

"We're not losing a lot of business because of those 3.9 percent or lower rates," Garrity says. "The bigger impact is the overall auto-industry market has slowed."

About 15 percent of STCU's loan portfolio is in auto loans, he says, adding, "We want to do auto loans."

Meanwhile, auto lending no longer is an emphasis at Inland Northwest Bank, says Randy Fewel, the Spokane-based bank's president and CEO.

"Over the years, auto financing has become less and less of our business," Fewel says. "My guess is that 15 to 20 years ago, car loans might have been 20 percent of our business. Today, it's about 2 percent."

Fewel says it's difficult these days for many banks to compete with the rates offered by credit unions, automakers, and the national financing networks offered through dealerships.

"Their rates are incredible," he says. "We can't match them."

Don Webster, business manager at Wendle Motors Inc., of Spokane, says that despite auto manufacturers' incentives on some models, the majority of financing used to buy cars through Wendle is handled through the dealership's online national lender networks, such as DealerTrack and Credit Union Direct Lending (CUDL). Such networks have become the dominant lending conduits in the last two years, he says.

"We're handling 70 to 80 percent of the financing" through them, Webster says, referring to the dealership, which sells Ford, Nissan, Infinity, and Suzuki vehicles.

He says the lender networks offer financing that typically matches or beats loan rates that car buyers can find on their own through banks and credit unions. Through the online systems, borrowers with good credit can have loans approved electronically in seconds, Webster says.

Because the Rancho Cucamonga, Calif.-based CUDL network includes about 50 credit unions in its Northwest region, the dealership often can arrange loans at the same rate customers can get from their own credit unions, he says.

"If, for instance, you just moved here from Seattle, and you're still with Boeing Credit Union, we can do it all right here for you," Webster says.

If a customer isn't already a member of a credit union in the network, but wants to finance a vehicle through the network, Wendle can help them sign up as a credit union member.

In such an arrangement, the dealership charges the lender a processing fee.

"Basically the lender pays us for doing the paperwork," he says. "It doesn't cost the customer anything extra."

Meanwhile, though it's nothing new for automakers to offer their own incentive financing as a way to attract more buyers to their dealer's lots, in a soft auto-sales market those offers often intensify.

In recent newspaper ads, Saturn and GMC both were offering zero percent interest for 72 months, while Mazda was offering no-interest loans for up to 60 months. Downtown Toyota and Downtown Honda were advertising incentive rates on certified used vehicles.

Scott Brewer, general manager of George Gee Automotive Group, of Liberty Lake, which sells Buick, Pontiac, GMC, Hummer, and Porsche products, says banks and credit unions can't compete with the zero percent, 72-month financing that manufacturers offer.

In the current down market, however, most manufacturers who offer such incentives have put them on large SUVs and full-sized pickups, which aren't selling well because gas prices are so high, Brewer says.

Even with the incentives, market values for trade-ins have dropped so much that the incentives haven't sparked sales as they did when such financing was offered in 2006, he says.

Buyers are more interested in higher-gas-mileage vehicles, which are selling comparatively well without interest-rate incentives, Brewer says.

He also says most people are financing through institutions in the CUDL and DealerTrack networks.

"Just about anybody who finances uses one of these two sources," he says.

Brewer says credit unions generally offer lower interest rates than banks, although larger banks, including Bank of America and U.S. Bank, "can get aggressive and be reasonably competitive," offering some loan rates below 6 percent.

Spokane-based Wash­ington Trust Bank isn't a member of the Dealer­Track network, and the bank doesn't specialize in auto loans, says James Mellott, spokes­man for the bank.

"We advertise them on our Web site, but, other than that we don't market them," Mellott says. "Commercial lending is our primary focus."

The bank, though, is marketing aggressively its line of home-equity loans, which he says often are tapped by customers to pay for automobiles, boats, and recreational vehicles.