A classic credit union offering is gaining new importance amid a period of sustained economic uncertainty. Personal loans, once a staple for funding hopes and dreams, have become a crisis-management tool as U.S. households struggle to make ends meet.
The personal savings rate was 3.5% in November, roughly half of what it was less than two years earlier and the lowest showing in more than a decade. Share growth at credit unions nationwide has been on a similar decline, a sign that members are struggling to set aside contingency funds. The result? Members need loans to keep the lights on and manage day-to-day expenses.
At Magnolia Federal Credit Union ($173.9M, Jackson, MS), the overall number of personal loan requests — also often called signature loans or unsecured loans — is up 62% year-over-year, says Dylan Mawhinney, vice president of lending. Average loan amounts are up by 32%, and the overall amount loaned is up a whopping 114%.
“I don’t want to say that all of these folks are supplementing their income, but as economic pressures happen, we’re seeing the dollar amounts go up for those requests because a lot of people are trying to supplement,” says Mawhinney, adding that most applicants are looking to consolidate credit card debt and improve their cashflow.
That’s by no means limited to the southeast. Across the country, Desert Valleys Federal Credit Union ($88.9M, Ridgecrest, CA) is tracking a similar trend.
“Pre-COVID, people would apply for personal loans for vacations or a new water heater or a wedding,” says CEO Eric Bruen. “Post-COVID, we’ve seen a much higher increase in crisis-management lending.”
Crisis moments have started to dominate the conversation as members turn to the credit union for help. Requests for $1,500 to pay rent or bills, $1,000 for taxes, or $600 to renew auto insurance or stay current on a car loan are increasing.
What’s more, neither Magnolia nor Desert Valleys are advertising their personal loan offerings — need and word of mouth is driving the growth.
Increased demand and touchy situations are forcing credit unions to have some difficult conversations with members. Magnolia talks with members about a loan’s intended purpose, and the level of need members have today is driving deeper conversations.
“We look at their previous history with unsecured loans and installment payments,” Mawhinney says. “We don’t want to dig into somebody’s personal life, but we do want to solidify that we’re doing this loan for the right reasons and that this is the right solution.”
New Tools For Spending = New Tools For Debt
Even as Georgia United Credit Union ($2.4B, Duluth, GA) pushes for growth in its auto and credit card portfolio, the cooperative is receiving an overwhelming number of personal loan applications, says Adam Marlowe, chief experience officer. The credit union is expanding into more rural markets, and Marlowe notes that the influx of personal loans suggests these members are facing a different set of circumstances than members in more populous areas.
Although inflation has improved and some costs have come down, that doesn’t necessarily offer wiggle room in the wallet.
“It’s still expensive for people to eat, work, have good hygiene products, and buy new clothes,” Marlow says. “Things they need to survive.”
That’s why Marlowe suspects more members are looking for cash or access to credit.
Part of the problem, says Desert Valleys’ Bruen, is that it’s easier for consumers to get credit than ever before. Whereas 20 years ago credit unions had a strong hold on the personal loan market, modern platforms like Klarna and AfterPay have changed the landscape, and crisis management has usurped dreams and aspirations as the primary driver of personal lending.
Bruen compares today’s Buy Now, Pay Later platforms, which are easy to access and convenient to use, to home shopping on steroids.
“The ability to be abused by it is easy,” the CEO says. “You forget how far you’ve actually indebted yourself, and then you’re crisis managing for your day-to-day bills.”
Desert Valleys can often provide a bridge for members to improve their financial standing, but it’s becoming increasingly difficult to do that when members don’t change their behaviors. Repeat borrowers have always existed, but the credit union is seeing more and more members coming back for a new loan as soon as they pay off the first — to the point that many carry on a pattern of repeating a six-month loan over the course of six years or more. The credit union even offers fee refunds if members don’t reborrow immediately after paying back a personal loan, but that hasn’t been enough to keep many members from continuing the cycle.
Pricing, Underwriting, And Collections (Oh My!)
5 Next Steps For Lending Leaders
As personal loan usage shifts from aspiration to necessity, credit unions are adapting how they lend, support members, and manage risk. Here’s five ways to do that.
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Analyze the loan portfolio to better understand who is borrowing for day-to-day expenses versus dream experiences. Consider adding a product with shorter terms or flexible payment schedules to fit the needs of members experiencing hardship.
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Train front-line and collections teams to spot early signs of financial distress and respond with supportive solutions. Proactive, earlier communications help here, too.
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Compare savings and loan trends. If savings is slowing and demand for short-term credit is increasing, this could portend trouble ahead.
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Evaluate underwriting criteria to ensure they account for current economic realities without excluding members who still pose acceptable risk, like ones with a history of on-time repayment.
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Finally, think beyond lending. Work with repeat borrowers to identify the root cause of their ongoing financial shortfall and steer them toward wellness resources.
Personal loans at Magnolia FCU generally perform on the same trendlines as the rest of its loan portfolio, and the credit union will lend to members with credit scores as low as the 400s. That creates some risk, acknowledges Mawhinney, but the credit union adequately stocks loss reserves to account for that, and many members routinely go to the credit union because they know they’ll get a fair shake, even with poor credit.
“We have those conversations about ‘If push comes to shove and you’re going to need help in the future, make sure you’re paying us first,’” Mawhinney says. “And they do, for the most part — especially those folks in the lower credit tiers.”
Rates and terms are competitive, although pricing goes up to 18% APR below a certain credit threshold — an improvement over payday and predatory lenders whose APRs can stretch into the triple digits.
To account for additional risk, Desert Valleys also prices its loans above market when compared to collateralized lending, Bruen says. Still, leadership is considering whether it needs to update any of its underwriting processes to account for demand and consumer behavior patterns.
As members increasingly tap personal loans to cover essential expenses rather than discretionary purchases, the California cooperative has adjusted how it approaches collections. A full-time collections team has been on-hand since it shifted to risk-based lending in 2004, but Bruen says the current environment requires a different level of personalization with a softer approach. The team now leads with problem-solving rather than enforcement, aiming to identify hardship early and connect members with solutions.
Desert Valleys has also increased how often it contacts members, so there are now more frequent touchpoints with members before the 60-day “serious delinquency” mark.
Magnolia leads with empathy, too, and collectors and lenders also work collaboratively on a weekly basis to identify loans that could turn problematic. Thankfully, Mawhinney says, the collections team — known internally as the credit support team — excels at building rapport with members to get to the root issue and work toward a solution.
“We’re trying to help folks here,” Mawhinney says. “That’s our goal.”