Take “Tooth and Claw” Out of the Short-Term Credit Equation

Don’t let the fear of loan failure deter you from offering aid in the short-term loan market. Learn what fellow credit unions do to reduce delinquencies and defaults.

 
 

The credit union difference has always been doing what’s best for members. Although short-term loans are considered far from ideal for lenders in the financial world, a small loan to pay bills, help a family member, or replace a tire often has a huge impact on a struggling member’s ability to sink or swim.

Many credit unions do not offer short-term credit options. When they do, the loans are packaged as emergency-only funds. Yet, for members in turmoil, any time they can’t get the cash they need, that’s an emergency.

Without using the high interest rates of predatory lenders, these loans may seem difficult to keep afloat and profitable, and fears of delinquency and default keep many credit unions from offering them.

“The credit union world is made up of conservative lenders,” says Bill Burke, chief executive officer of Day Air Credit Union ($202M, Kettering, OH) and chair for Credit Union Outreach Solutions, Inc.

COUSI is a credit union service organization that provides a standardized StretchPay program, offering 30 day loans in $250 or $500 increments for a small annual fee and 18% APR. More than 50 credit unions across multiple states use the program, and to join, each credit union pays COUSI $25 for each million in assets up to a max of $15,000.

Although rates vary slightly according to the underwriting each credit union employs, the program’s average 90 day delinquency ratio is approximately 3.34%.

 “There are lots of mortgages and auto loans with 4% delinquency” says Burke, indicating the loans represent minimal risk when properly executed. And StretchPay annual fees go into CUOSI’s “loan loss reserve fund,” allowing credit unions to play it safe and cover loss without charging interest rates that do more damage than good for the borrower.

Even for the credit unions that offer it, short-term lending often makes up a small portion of the institution’s service offerings. For example, at Wright Patt Credit Union ($1.7B Fairborn, OH), StretchPay loans account for only $1-1.5 million out of its $1 billion loan portfolio, says Doug Fecher, president and chief executive officer. Yet for the members who use it, the service is always in high demand. The credit union has approximately 4,000 outstanding Stretch Pay loans at any given time.

Langley Federal Credit Union ($1.7B, Newport News, VA) has maintained an impressive default rate of less that 1% on its QuickCash short-terms loans, something its vice president/chief marketing officer, Brett Noll, chalks up to the requirement for members to set up direct deposit before taking out a the loan.

Other techniques popular among short-term loan programs include requiring membership for a certain time frame before borrowing higher amounts or before borrowing at all.

Carolina Trust Federal Credit Union ($155 M, Myrtle Beach, SC) currently offers a micro loan program and has considered payday alternative programs in the past. Tonya Haun, head of operations and chief lending officer for Carolina Trust, says micro loans make a real difference for members who need them, and, as a result, they almost never default. “They appreciate the helping hand,” she says.

Short term credit may not be the largest or most profitable programs credit unions can adopt but the need for affordable short-term credit is present in most communities. Adopt a strategy focused on safety when offering short term loans and your credit union can mitigate risk while meeting the demand for this necessary member service.