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We Could Have Made Her a Better Loan . . . According to Who?

By Kirk Bowman, CEO Proforma
December 2021

See if this sounds familiar. You’re a credit union auto lender reviewing Rachel’s loan from a car she bought and financed at a dealership two years ago. Your first thoughts are:

        You’re paying WHAT interest rate on your car loan?

        11.50% is predatory!

        We could have made a much better loan.

        I wish she would have come to us first.

But is that really true? Let’s look not with lender eyes, but from the view of Rachel’s real life as it was 24 months ago.

Rachel had a FICO of 644 when she needed a car. She just finished community college and found her first job at entry level pay. Her credit score got dinged during the no margin life of a part-time employed, full-time student. But she had good reasons to believe all that would change with full-time work and pay raises in a growing industry. She was on the cusp of turning the financial corner and needed affordable, reliable wheels to make it happen.

Even so, your credit union would have made her the following loan offer for a new $20,000 Nissan with a warranty.

  • 10% down
  • 7.50% interest
  • 72 months
  • Payment = $311.22

The ‘predatory’ offer from the dealership was:

  • 0% down, plus lender advances the sales tax
  • 11.50% interest
  • 84 months, with first payment at day 60
  • Payment = $363.65

Why did Rachel choose the higher rate? Doesn’t she know better? Perhaps she needs more financial literacy on how loans work?

Let’s look at this simplified comparison:

Do you see what Rachel sees? She isn’t uneducated. She’s measuring her current situation against a hopeful future.

According to the latest GOBanking Savings Rate Survey, 45% of Americans have no measurable savings, with an additional 24% having fewer than $1,000. In other words, there is a greater than 70% chance that Rachel doesn’t have the money for Day 1 of the credit union offer! Of course, the credit union offer would give her more equity over time, but car equity doesn’t buy groceries or pay rent. Further, with the dealership offer, the total cash outlay for Rachel is lower at months 24, 36, and 48. Statistically she will no longer own the car after this.

Now imagine growing a portfolio of Rachels at your credit union. What if you packaged below-prime auto loans with feasible terms, rather than the more common view of a ‘good loan’? By allowing higher initial LTV, then properly risk adjusting the rate by an additional 400 bps, you can solve a critical issue for the member in need of reliable wheels. And best of all, this new approach creates stronger loan yield for the health of your credit union.

About Proforma

Founded by a team of lifelong entrepreneurs and credit union experts, Proforma offers an end-to-end solution that helps credit unions drive higher yield while deepening member relationships. We identify less than prime auto loan applicants, originate the loans, service the new members loan relationships, and manage the program risk through automatic loan repurchase at full value.

Members benefit by seeing the interest rate on their auto loan decrease after successfully completing a certain number of payments.