Auto Loans – What should the rate be?
When rates are climbing all credit unions want to raise rates but they don’t want to be the first one to move too fast and to much higher than the competition.
So what should the rate be right now? If you look at what your competition is charging first then shame on you. You need to ask what rate do you need to make a profit.
Method #1
Treasury Bill – The current rate on a 5 year Treasury Bill is 2.6%. A credit union could invest for 5 years with little fuss or risk at 2.6%. So, we need more than 2.6% to invest in one of our best members. Members with good credit have a charge off rate of .10 to .50% depending on the economy. Let’s say .25% at your credit union. So we need at least 2.85% + plus the expense of a staff, statements and overhead. That’s be at least another .5% to 1%. So the rate should be between 3.35% – 3.85% for you best members.
Method #2
Mountain America CU is really big and really smart. They’re charging 3.75% so you should charge 3.50% to 3.95% to be in the ballpark with the really smart big credit unions.
Method #3
Since a member can earn 2.65% on a 5 year treasury bill with no risk. He should get at least 2.7 to 2.85% APY on a 5 year Savings Certificate. So if we’re paying 2.85% on a CD you should be making a profit on your best members auto loans. A profit of .50% should be the minimum and 1% would be even better. So the rate should be 3.35% – 3.85%.
Method #4
Plug it into your ALM model and make sure all 521 variables are entered correctly. If you’ve entered it correctly you’ll find you’ll need at least 3.5% on an auto loan for you best members.
I’m sure you have a better method. I’d like to hear it.