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In an about face from its earlier expansion plans, Citizens Bank recently announced it is going to shrink its auto loan footprint. From 2010 to 2015 Citizens Bank expanded its auto lending from 23 to 43 states. It now says it will cease auto lending in 20 states outside the Northeast, Mid-Atlantic, and Midwest, bringing it back to its pre-expansion level. The reason given by bank officials is that the bank wants to focus on achieving higher risk-adjusted returns on its auto loan portfolio through better quality loans with less emphasis on volume.
The bank expanded fairly quickly in a five-year time frame due to higher consumer demand. But, in the last year, consumer demand has decreased. Citizens reported a three percent decrease in its auto loan portfolio in the second quarter and loan originations fell from $1.8 billion to $1.3 billion from year-over-year.
Background on Citizens Bank
Citizens Bank is part of the Citizens Financial Group, one the oldest and largest financial service institutions in the U.S. The Rhode Island-based company was founded as High Street Bank in 1828. The bank’s primary footprint covers 11 states and it also has a strong online presence. The bank offers a complete range of banking and lending products, most recently adding a suite of private student loan products.
Are Auto Loans in Citizens Bank’s Future?
At one time it offered auto loans for new and used vehicles with terms ranging from 24 to 72 months. We say “at one time” because in a recent look at their website we found no offering for auto loans, which makes us wonder whether they have stopped offering them altogether or they have temporarily pulled the product from their website. Its announcement implied that it will continue to offer auto loans in the 20 states that comprise all or a portion of the Northeast, Mid-Atlantic and Midwest, but there has been no further clarification as to when and where they will be offered in the future.
The Auto Loan Alternative
Instead of offering auto loans the bank is promoting home equity auto loans, stressing easy access and lower interest rates. Customers can take out a home equity loan or line of credit for up to 80 percent loan-to-value to purchase a new or used car. For people in the right financial circumstances, using a home equity line of credit for a car purchase might make sense. However, there are risks in doing so. If a home equity loan is used the typical repayment period is between 10 to 20 years, which means you could be paying on your car long after its useful life. Your monthly payment will be lower but you will spend much more in interest costs. Also, when you tap your home equity to buy a caryour home becomes collateral, so if you can’t make the payments you could lose your house.
What Will Citizens Bank Do Next?
Citizens Bank’s decision to reign in its auto lending just a couple of years after expanding it seems fairly abrupt. Auto sales have been slowing in the last couple of years which has reduced demand for auto loans, so perhaps their expansion outpaced their profits. Based on its announcement the bank wants to pursue higher quality loans that generate a higher return. It sounds as if they are restructuring their entire product line for the remaining 20 states. There is nothing on its website to indicate when that will happen. So, for now, if you are a Citizens Bank customer who wants to buy a car you can take out a home equity loan or choose a different lender.
Author: Jeff Gitlen