Credit unions make loans in lots of ways: autos, mortgages, home equity, secured and unsecured. Most of those traditional loan types are big-ticket items. So what if credit unions also made loans the small way?
A new white paper (authored by Jim Jerving) for CUNA’s Lending Council examines the small loan market—those loans up to $15,000. The paper (Fighting for our Turf: Threats to Credit Union Small Loan Markets) explores views and practices of many successful lending practitioners.
“The small loan market is rapidly expanding, especially on the Internet,” says Jerving. “There are a number of opportunities in the small loan market.”
Some of the key insights the report offers include:
- There is still a market and rationale for making loans in the $200 to $600 range.
- Small loans may be unprofitable in the short-term, but they serve to deepen the relationship with the member, who will come back for more services if satisfied with the transaction.
- Credit unions are offering payday loan alternative that balance advantages of a payday loan—convenience, short-term cash—with member education and reasonable rates.
- A hybrid approach is possible with peer-to-peer lending and relatively inexpensive compared to other available options in the marketplace.
- There is a movement among lenders toward a more holistic underwriting approach that goes beyond the credit score and has more of a focus on willingness to pay.
One of the best parts about the white paper is a section titled “Lessons Learned.” Every credit union mentioned in the white paper has unique circumstances and markets. By examining their data and experiences a number of lessons emerge.
“The experiences of lenders outlined in this paper indicate that just by adjusting underwriting standards slightly and working with “B” and “C” credit members, more loans are put on the books and net interest margins are boosted,” the paper notes. “Holistic underwriting is gaining traction as it looks at the ‘whole’ person, especially their willingness to pay and historical support of the organization.”
If your credit union is seeking loan growth—and which one isn’t—then making loans the small way may help you reach your target numbers.