Consumer Lending: Leave No Stone Unturned

BY SCOTT BUTTERFIELD, GUEST AUTHOR

Today’s competitive landscape requires many different loan-growth strategies that range from squeezing a little more from indirect auto channels, to a plan to increase higher-yielding consumer loans. Today’s lenders are always working toward that optimum balance of yield and risk, seeking growth through tighter member relationships, and better market penetration.

In a perfect world, we hope to achieve loan portfolio “nirvana” with high loan deployment, solid loan growth, high loan products per member, increasing market share, and the best mix of products to maximize interest margin and risk. As you pursue your version of loan portfolio nirvana, don’t forget the opportunity and importance of personal, unsecured consumer loans.

A clear path to optimizing your loan portfolio

Good old-fashioned unsecured personal loans were the foundation of the early credit union movement. Access to personal and unsecured loans was our niche, and we exploited the hell out of it. Members were served, lives improved, and credit union capital was built. I believe there is still plenty of opportunity for credit unions to pursue personal unsecured loans to fill an important consumer need (that is in line with most of our mission statements), and to fill a small, but important niche in our loan mix: higher yield loans that increase members’ relationships with their credit union. If you believe that an injection of higher-yielding consumer loans would help the overall yield of your portfolio and improve deeper member relationships, read on.

The following are some consumer loan insights to consider, reported in the 2018 Alternative Financial Services Lending Trends Report by Clarity Services, a part of Experian.

Consumer need and demand

Online installment lending has continued its growth in both number and funded loan volume, while growth has slowed in both categories for the online single pay market. Not only have average installment loan amounts increased, but consumers are also opening more loans per year. The overall funded loan volume growth from 2013 to 2017 was nearly 500 percent.
Online installment borrowers have remained active in the market, and have used more credit each year. Between 2016 and 2017, the average credit utilization per borrower (average loan amount times average number of loans) increased from $1,861 to $2,163. This data clearly demonstrates a high need and growing demand for personal, unsecured consumer loans.

Credit quality for online installment loans continues to improve year-over-year. Installment borrower incomes are significantly higher than single pay, and have been increasing over the past five years. Overall, borrowers leveraging online channels for loans tend to be younger than storefront borrowers. Surprisingly, Generation X is the largest user group in the online channel, leading Millennials by a full 7 percent.

Take a closer look

If your loan portfolio could benefit from a higher-yielding pool of consumer loans, here are a few things to consider:

• Look at more opportunities. Millions of Americans lack the credit histories to secure a loan in the prime credit market. Subprime consumers are often viewed as a single, uniform segment of the population, even though the circumstances, behaviors and intentions behind their use of credit are vastly different. For each consumer, we must consider what led to their poor credit status. Is the consumer a young person without sufficient credit history to properly qualify for a traditional loan? An otherwise creditworthy consumer who encountered a destabilizing financial event like a job loss or unexpected medical issue? Affordable consumer installment loans are crucial to many of these consumers to help them manage monthly expenses through periods of financially destabilizing events, and income volatility.
• Use alternative credit data to take a closer look. In the near prime and subprime market, consumer stability is directly linked to future loan performance. Frequent changes to a consumer’s mobile phone number, bank account, or home address are often associated with increased risk. In 2017, consumer stability remained consistent, with little change to key attributes often associated with risk. Consider using alternative data, such as Clarity Services, a part of Experian, to identify more eligible borrowers and
  more accurately evaluate risk. The use of alternative credit data provides a more holistic view of a consumer’s credit history, allowing for a more informed credit decision.
• Leverage online lending channel. Besides using alternative credit data to qualify more borrowers, optimize member convenience and the profitability of these loans through online lending channels. You don’t want to give away too much of the higher-interest margin on expensive manual processes. As pointed out in the 2018 Alternative Financial Services Lending Trends Report, the demand and use for personal consumer loans is clearly via online.

Why it matters

For many of us, allocating another 5 percent or more of our loan portfolio to higher-yielding consumer installment loans would have a measurable impact on net income, and is likely to increase the number of loans per member through cross-sells. Credit unions can book these loans at higher rates (there is lower price sensitivity), which are still considerably less than the rates at predatory providers. These loans can also be a significant contributor to the health and diversity of your portfolio. With alternative financial credit data, you can ensure your terms are competitive while more effectively managing risk.

In their effort to leave no stone unturned, it makes sense for credit union marketers and lenders to consider alternative credit data sources to find good borrowers who are flying under the radar – first, before anyone else. Market opportunities are ideal for credit unions to recapture some of the consumer lending that has been lost over the years to non-traditional lenders.

Scott Butterfield
Scott is the Principal of Your Credit Union Partner, PLLC.
www.yourcupartner.org