Consumer Automobile Loans

The return earned on consumer loans is critical for credit unions, as a federal interest rate maximum applies to consumer loans extended by federally chartered credit unions, which account for approximately threequarters of all credit unions in the country (Wolken and Navratil, 1981). Competing financial institutions (commercial banks, and consumer finance companies) are, thus, better able than are credit unions to offset greater risk with greater return. This disadvantage of the credit union makes the risk assessment process of crucial importance for the credit union.
For most credit unions, the key concern with respect to the return on consumer automobile loans is the spread between the interest rate on the loan and the cost of the funds from which the loan will be made (Davids, 1984). Almost all of the loan capital for credit unions is acquired through member shares, which, in effect, are credit union member savings accounts (Bogen, 1990).
Credit unions, as membership institutions, typically have a greater obligation to extend consumer loans than is true of competing institutions. Thus, credit unions are less likely than are commercial banks and consumer finance companies to invest funds in financial securities at times when consumer loans may not provide a return equal to those available in th

The variations in conditions which may exist and the variations in potential outcomes are referred to as states of nature. In the TSP Model, the probabilities of occurrence associated with each of the states involved in the decision problem must be determined, and must be incorporated into the decision analysis leading to an investment alternative selection.

 

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