Lending is the backbone of your credit union. Being able to offer credit to as many qualified members as possible is important, but must be done carefully and in line with your credit union lending parameters in order to minimize risk. The key to making smart decisions and having a strong loan portfolio is to know your members, their financial background, credit history and work with them closely in order to choose the loan product that is most appropriate for their circumstances.
With that in mind, here are some lending myths to reconsider when looking to extend credit:
High student loan debt means risk when lending. Carrying a large amount of student debt, especially in the Millennial population, seems to be the new norm for many loan candidates. It can often feel like an obstacle to many and may deter them from applying for a loan, such as a mortgage, feeling the answer is an immediate 'no'. However, though an applicant's debt-to-income ratio may be high, it is also an indicator of future potential that lenders should recognize. According to Zillow - a household that carries 50K in debt, but in which someone possesses a masters degree, has a 75% chance of owning a home. Similar numbers are also reported for those possessing a bachelors degree. In contrast, remove a degree from the household, and their odds of achieving homeownership drop to 40%. The bottom line - higher education is an indicator of future earning potential, and loan originators should take a second look.
Millennials aren't buying cars. In the last few years it was widely reported that Millennials as a general population were not interested in buying cars, instead opting to use their money for other investments and being more conservative with their money. However, a 2017 report from Transunion showed that Millennials were, in fact, buying cars - and at a 21% higher rate than their Gen X counterparts. This means there is great opportunity to lend to this population group. Additional research from Kelly Bluebook and Auto Trader further indicates that Gen Z is also leaning strongly towards future vehicle ownership. What does this mean? Credit Unions should increase their auto lending options, including opening up more new and used car loan variations and expanding indirect lending programs, as it appears the future will be (and already is) ripe for the auto loan market.
Second chance loan requests are too risky. Many credit unions use a committee format to arrive at a lending decision for an applicant. If upon review, a member is initially turned down for credit, there are certain situations where members opt to reapply. They might feel they have the income to support a loan or credit card offer. As a credit union member, the applicant has a unique personal investment in being approved for a loan and reapplication is often an indicator of strong motivation and desire to rebuild credit. Being the one to give your member the opportunity to improve themselves and their credit can be a great motivator toward loyalty and future business and shouldn't be discounted.
Credit unions are known for their exceptional credit union member experience and taking care of their members. Though it may not always be feasible, in the right situation, extending credit may be a great opportunity not to be missed.