Please note: This is a work in progress. If your question is not answered here, please contact us so we can address it and add it to the FAQ.
General Product Questions | Financial Questions | Target Market Questions
General Product Questions
Q: What happens if the member can no longer afford the additional savings amount and wants to discontinue the program?
A) The savings rate will drop down to the current rate for the certificate term. The certificate will not mature until the loan is paid in full.
Q: What happens if the loan is paid off early?
A) The certificate will mature without penalty. The certificate value will be deposited into the regular share account upon loan pay off.
Q: What if the loan becomes delinquent? Can the certificate be used as collateral?
A) Savings can be used as collateral because the account is tied to the loan.
Q: How many times can a member use this product?
A) Each credit union has to make this decision. However, this product is intended to help build discipline over the course of time. One institution may make it a one-time deal. Others may consider allowing members to open a NEW savings account STARTING AT ZERO each time the member opens a new auto loan.
Q: Does the member have access to their money?
A) We suggest using a Certificate product for your deposit account. That way, if a withdrawal is made before maturity an early withdrawal penalty will apply. Once the loan is paid off, the certificate will mature as well. The funds would then be available to withdraw or to reinvest in any deposit product. However, if your institution chooses a different deposit product to structure the account, we still suggest limited withdrawals or incremental rewards to encourage the member to focus on saving.
Q: What happens to the certificate when the loan pays off?
A) The certificate will either renew to a like-term certificate (for those who really want to continue to save) or it can be rolled into the member’s savings or checking account upon loan payoff.
Q:What if the member stops automatic payments to the loan and pays by cash or check?
A)The automatic payment is a requirement. If automatic payments are stopped, the promotional rate moves to the lower of the credit union’s standard certificate rate or savings account rate.
Financial (CU) Questions
Q: Why pay a high rate on deposit account?
A) A typical savings rate does not provide enough of the “WOW factor” to get someone who has never been able to save to change their habits. The prospect of a high rate and the ease of saving will be enough to make a “saver” out of someone who has been reluctant to do so in the past. The idea is to help teach the member that they too can save for the future. This will make them a more valuable member to the credit union in the future. Although we recommend that the credit union pay the higher deposit rate, it is flexible to permit each credit union to determine what rate that it pays.
Q: How can you afford to pay such a high rate of return on deposits?
A) The idea is to create a product to encourage member savings. Through this product, members who have not historically saved on their own will see the value in saving money and build the discipline to save. The rate works because the product is connected to an auto loan. We chose auto loans because it is a very natural product for the target market.
Q: How can you afford to do this?
A) Even at the 8% certificate level, the yield is 6.81% at 3 years and 6.24% at five years. That’s nearly twice the investment yield credit unions can earn and we are working to build a relationship with a member.
Q: What is the difference, in dollars, between the high-rate scenario and just paying a normal savings rate?
A) This will vary depending upon the terms of the loan. The certificate is tied to the loan, maturing when the loan is paid in full. Here are two scenarios:
1) Member “A Credit” has a $15,000 auto loan at 5% with a term of 60 months. The monthly loan payment is $283.07 prior to the additional deposit being made.
Given that most 60-month auto loans pay off early, we’ve used a 3-year example for the savings product. The following results:
The DriveUp Savings will pay 5% as opposed to 3% for a 3-year certificate. If a member deposits an additional $28.31 per month, which is 10% of the loan payment, the member will accumulate a savings balance of $1,102 with the 5% certificate over the course of 36 payments as opposed to $1,068 at 3%. This is a cumulative dividend expense increase of $34 over the course of 3 years. At five years, the difference is $95.
2) Member “B Credit” has a $15,000 auto loan at 8% with a term of 60 months. The monthly loan payment is $304.15 prior to the additional deposit being made.
The DriveUp Savings will pay 8% as opposed to 3% for a 3-year certificate. If a member deposits an additional $30.42 per month, which is 10% of the loan payment, the member will accumulate a savings balance of $1,241 with the 8% certificate over the course of 36 payments as opposed to $1,147 at 3%. This is a cumulative dividend expense increase of $94 over the course of 3 years. At five years, the difference is $269.
Q: Why do you limit the deposit to a percentage of the monthly loan payment to receive the promotional rate?
A) The limit is to protect the credit union’s yield. If not in place, a member could conceivably place a $15,000 deposit at 8% with a corresponding 8% loan at $15,000. No one likes to do loans for free.
Also, the deposit balances increase over time while the loan balances decrease over time as the loan is paid down. This situation lowers yield the longer a loan (and corresponding certificate) is held. Limiting the deposit does limit the amount of savings dollars that will be paid the premium rate, keeping the product from becoming a loss leader.
Target Market Questions:
Q: Who will the target market? Will we have to raise loan rates to make up lost margin?
A) This product should be targeted to members who are age 18-34 with less than $500 of aggregate savings within their credit union account. However, any member can join in the savings.
Q: Do we really want to cater to members who do not have the discipline to save?
A) Society has changed considerably over the past 50 years. In general, people do not save. This is true due to many causes. However, as a result, many of our younger members need some help getting started. These members will eventually be the mature members who need loans and other savings products. DriveUp Savings will provide your credit union with an opportunity to make a difference in your members’ financial lives and hopefully start a lifelong financial relationship.
