A Good Idea — Almost
With gas prices at record levels, just about every car ad today touts gas mileage. So it’s no surprise that lenders are jumping on the bandwagon, too.
Yesterday, Truliant Federal Credit Union unveiled its “Fuel Efficient Auto Loan,” an offering that rewards car buyers for buying vehicles that get at least 29 miles per gallon.
The concept is right on the money: Develop a product that tugs at people’s purse strings.
But some of the loan’s details could hurt the credit union in the long run. The Fuel Efficient Auto Loan applies to both new and used vehicles, not just hybrids. It offers a 0.5% rate discount — a definite draw for car buyers. The final component of the loan, though, is that it can be used to finance as much as 135% of a vehicle’s value. The relatively high loan-to-value ratio is aimed at owners of sport utility vehicles and light-duty trucks, whose values have plummeted in recent months.
“By allowing individuals to finance up to 135% of the vehicle’s value, we are providing them with a way to get out of their current situation and drive a more affordable vehicle,” said Joseph Whitaker, executive vice president and chief operating officer of the Winston-Salem, N.C.-based credit union, in an article on CarolinaNewswire.com.
But that 135% loan-to-value is going to come back to bite the credit union. Lenders across the board have been lowering — not raising — LTV maximums as they tighten underwriting criteria and attempt to reduce delinquencies. The reason is simple: By financing the vehicle for more than it’s worth, the credit union is magnifying its potential loss exposure.
Here’s an example: A consumer buys a $15,000 car, for which Truliant provides a $20,250 loan. At 8% interest, it will take the consumer 18 months to pay down the loan to $15,000. By that time, though, the vehicle will be worth much less than the original amount. In fact, some cars lose 35% of their value in the first year. So if the consumer defaults on the loan anytime in the first 18 months, the credit union will take a loss.
I think Truliant needs to go back to the drawing board on this one.
