Direct-loan channels expand, but no big impact on dealers -- so far

Consumers have more and more opportunities to apply for direct loans online, but so far, direct loans don't seem to be making much of a dent in indirect loans negotiated at the dealership.

That's an important distinction for dealerships because they typically make more from dealer reserve on indirect loans, in which the dealership earns a cut of the interest-rate profit, than they do from flat fees on direct-to-consumer loans.

According to Power Information Network, customers who paid cash or who got a direct loan accounted for 20.4 percent of U.S. retail volume in the third quarter of 2012, down from 21.8 percent a year earlier and from 22.8 percent in the third quarter of 2010. That decline reflects the comeback of the Detroit 3 and their respective lenders after 2009.

Even so, direct-loan channels are definitely on the march. Last month, for instance, RoadLoans, the direct-loan channel for Dallas-based subprime lender Santander Consumer USA, signed up with eBay Motors.

RoadLoans is offering eBay Motors shoppers online applications for direct auto loans and refinancing for existing loans. RoadLoans also signed up this year with AutoTrader.com, Cars.com and Kelley Blue Book's kbb.com. Among them, those sites list millions of new and used cars.

"We're working to establish relationships with a lot of the automotive shopping sites," says Lana Johnson, Santander Consumer USA vice president in charge of the online channel. Those preferred-lender relationships are not exclusive, she says..

Santander Consumer USA said earlier this year that it gets 15 to 20 percent of its auto loan applications online through RoadLoans but that direct loans account for substantially less than 10 percent of its total loans. That means many if not most of its direct-loan applicants switch to an indirect loan at a dealership.

Santander was No. 5 in U.S. used-vehicle loan volume in the thirdquarter and No. 9 overall, according to Experian Automotive.

Another subprime auto lender, CarFinance.com in Irvine, Calif., launched a direct-to-consumer channel this year. The company started offering indirect loans in May 2011.

CarFinance Capital CEO Jim Landy says the online lender is “in conversations” with banks and credit unions, potentially to make direct loans available to their subprime customers.

'A lot of opportunity'

"We think there's a lot of opportunity there," said CEO Jim Landy at an F&I conference in Las Vegas in October. He said the online lender is "in conversations" with banks and credit unions, potentially to make direct loans available to their subprime customers. "They can't say yes to a lot of their deposit customers," Landy said.

Meanwhile, Credit Union Direct Lending, better known as CUDL, said its AutoSMART auto shopping site recently passed 7,000 dealerships and 1 million new and used cars and trucks in dealer inventory listed on the site.

About 82 percent of the dealers listing inventory on the site are franchised, new-car dealers, says CUDL spokesman Bill Meyer. The rest are independent, used-car dealers. He said inventory listed on the site is 60 percent new vehicles and 38 percent used. The remainder is made up of RVs, motorcycles, boats and the like.

Credit unions using the site offer both direct and indirect loans, said Phil Maniaci, senior vice president of CUDL Automotive.

Credit unions accounted for about 18 percent of new- and used-vehicle loans combined in the third quarter, up from about 17 percent a year earlier, Experian Automotive says. Most of the increase was in new-vehicle loans. Credit unions accounted for about 12 percent of new-vehicle loans, up from 11 percent a year ago, and about 22 percent of used-vehicle loans, roughly flat with a year ago.

In a recent Frost & Sullivan study that makes some general projections out to 2018, the market research firm said competition from online direct-lending channels likely would narrow margins for indirect lenders. The study cited "easier access to information, increasing social connectivity, and higher levels of awareness among consumers."

However, online loans don't seem to be much of a threat to indirect loans at the moment, says Stephen Spivey, program leader, automotive and transportation.

He says that today, lenders are using online applications, smartphone payment apps and other online features primarily as a way to differentiate themselves rather than to grab for share.

"These features don't seem to have big impact now," Spivey says. "By 2018, they may be more of a factor."