PenFed Credit Union will begin offering its members a balloon auto loan this summer that removes one of the biggest risks these loans pose for borrowers: repossessing their cars because they can’t afford the payment. final.
Consumer groups are wary of current lump sum auto loans, comparing them to lump sum mortgages that sparked many foreclosures during the housing bubble before the Great Recession.
Loans are designed to be attractive to consumers because they have significantly lower monthly upfront payments – which consumers pay great attention to – while they have a large and often unaffordable final payment down the road – which consumers tend to pay close attention to. ignore or rationalize.
On conventional balloon loans, if consumers can’t make that final payment, they can refinance, rack up more interest charges, or lose their car through repossession, damaging their credit report.
However, PenFed’s “Payment Saver Plus Program” removes the risk of credit damage, making forfeiture another option to meet the lump sum payment obligation.
“They don’t have to risk a negative credit report,” said Ivan McBride, vice president of auto loan product sales at PenFed, Tysons, Va. ($ 24.5 billion in assets, 1.7 million members).
McBride said PenFed tries to work with its mission of serving members, while recognizing that many of its members manage cash flow, making the size of the monthly payment their main concern when financing a car.
The loan program is facilitated by Auto Financial Group (AFG) of Houston, which has tried to encourage leasing among credit unions and other lenders by guaranteeing residual values and providing services designed to make lending- lease an almost turnkey operation.
A balloon car loan is similar to a lease in that the final payment is based on the residual value of the vehicle. The larger the residual, the lower the pre-balloon payouts that can be offered.
However, betting on the value of a new Toyota Corolla or Jeep Cherokee five years from now involves a level of sophistication beyond the reach of most credit unions.
It was space companies like AFG and Fusion Auto Finance based near Fort Worth, Texas that worked.
In PenFed’s balloon program, AFG will guarantee the residual, contact owners in the last year of their loan to determine their plans, and deal with the remarketing of the cars in the Walkaways.
PenFed will be among the first to offer these types of loans for new cars and used cars for up to five years, said Joe Leonard, vice president of indirect auto sales development at PenFed.
“It will be an industry leader in that we are also ready to tackle the used car market,” said Leonard.
Ivan McBride, vice president of auto loan product sales at PenFed, said the credit union is still primarily a direct lender to its members. He encourages members to study the prices of the car they want and get pre-approved.
They should “not be focusing on paying when entering a dealership,” he said. “I would settle a price with the dealer first.”
Lump sum lump sum loans are designed for members who are drawn to the features of leasing, but want to own the car without the huge term risk of not being able to meet a lump sum payment.
“We know consumers want flexibility in their payment, and we think we’re going to hit the mark with this one,” McBride said.
PenFed plans to roll out these new Payment Saver Plus loans through indirect funding starting in Virginia and Maryland in June, then California in July, Florida in August, and direct loans by the end of the year. ‘year.
The rollout will be accompanied by educational material on PenFed’s website, blog and social media.
“We know there is going to be some education needed to make consumers more comfortable with what a balloon take out product is,” McBride said.