Auto Loan Interest Rates

There are a few credit unions reacting to lower rates by lowering their Auto Loan Rates. Most though, seem to be very busy reacting to the Coronavirus rather than worrying about rates.

The Coronavirus hopefully, won’t last forever. At some point we’ll have to react to a most certain recession, you know the one that is already here. Rates will likely stay low for awhile. Maybe it won’t matter though, since there will likely be very few auto sales anyway.

Savings Certificate Rates

Wow, credit unions are pretty quick lowering their savings rates. As usual, much quicker lowering savings rates than lowering loan rates.

We’re in for a period of hunkering down to avoid the Coronavirus. I’m thinking most people aren’t thinking about savings right now…other than to use it for groceries and toilet paper if it ever appears on the shelves again.

Considering that a 6 month treasury bill is .23% the .50% plus you can earn at the credit union isn’t a bad deal. Even better when you consider the performance in the stock market.

It appears a few credit unions even lowered their savings rates. I didn’t think it was possible to lower from .10% but what do I know. Maybe we should encourage members to spend their savings since it’s not worth putting it into a Share account. The economy will need it more than we will…

It’s a crazy time. The pandemic was bad enough then we got rocked by a 5.7 earthquake in Salt Lake City. About 15 seconds into the quake I vowed to go to church much more regularly. My son joked that he thought it may be locusts reining down on us next. We’ll see.

In the meantime, lower your Money Market and Savings Certificate rates! Until things got so competitive in Salt Lake City we used to be .25% or so above the treasury bill rates. Now it’s up to you and how bad do you need money?

Auto Loan Interest Rates

My first advice is to never have your Marketing Department set your interest rates. What your competitors are paying may be an important factor when setting your rates. However, your first step should be to calculate what rate of return you should be getting on your investment.

For example, if you can get 3% on a 3 year treasury note you will want to charge more than that for an Auto Loan. (If not, why not just invest in a 3 year treasury). You’re likely going to want charge .75 – 1.25% higher than a federally backed investmnet to pay for the extra risk you’re taking on. A margin necessary to pay for charge offs and overhead.

This all get complicated when your competition is setting rates that don’t alway follow common snese. Their actions will often cause you to react with some adjustment to your calculations. However, the point is, don’t set your rates solely from the “rate survey.”

Rate Surveys

Rate surveys are inheritantly difficult since rates are not always easy to compare. Many credit unions advertise their “best” rate. This “best” rate is only available to members with a perfect credit score, generally 740 or better, and often requires the member to have a checking, a VISA, direct deposits and a myriad of other relationships.

Recommendation

On January 8, 2020 the average rate is about 3.25% for 60 month. About the same as our previous survey in September, 2019. Most Credit Unions should set their A+Auto Loan Rates at about 3.25% for 60 month. I’d recommend 3.75% for 72 months and 4.50% for 84 months.

Most importantly, your credit unions needs to be very competitive on the 60 month rate for A+ borrowers. For longer terms and for members with credit scores less than A+ your rates have to be competitive but not necessarily the best.

Savings Certificate Rates

We’re starting to see less of a range between the larger credit unions’ published rates. They appear to be setting rates based on their credit union competition rather than where they ought to be.  I say this because Utah credit unions are paying too much for Savings Certificates with terms of 3, 4 and 5 years. As usual, these rates are much higher than financial instutitons in most other parts of the United States.

Based on current treasury rates we should see CD rates continue to drop on the longer end. As this happens, we may also see Auto Loan rates continue to decrease.

Recommendations

If you have access to the Federal Home Loan Bank you can borrow at 1.97% for 5 years so why pay 2.30% for 5 year money? Of course, it’s nice of credit unions to pay a premium to members but the most you should pay on a 5 year CD is about 2.10-2.25% APY. Until the big credit unions quit paying this premium and bring their rates down, you may have to compete with a slightly inflated rate.

Notice that at 6 months we’re at about the same rate as a loan from the Federal Home Loan Bank. Also, the 6 month treasury is at about 1.55% + .25% = 1.80% (this is about where the big credit unions are now). So it may make some sense to compete on the short end and let the big credit unions have the longer term money for now.

Of course, it depends on how much money you need right now. Good luck.