How do you determine which lending product provides your credit union with the maximum return in the most efficient way possible? Which attributes should you consider when deciding which loan products will get your credit union’s dollars?
Difficult Market Conditions Ahead
A Wall Street Journal survey of economists showed that the average probability of a recession in the next 12 months is 25%. As the economy inevitably contracts, demand for borrowing will decrease and rates will come down to stimulate recovery.
In addition, the average credit union loan-to-share ratio is at its highest point of the past two decades. When interest income accounts for 73.5% of credit union revenue it becomes a tricky balancing act to maintain income when liquidity is low. Selling loan participations will only go so far as supply outstrips demand during a downturn. To compound matters, the new CECL requirements must be taken into consideration since the profitability of each loan product will depend on its credit risk level.
To succeed under these conditions, credit unions must ensure they are efficiently maximizing the return on every dollar they lend. As loan products compete for your every dollar, it’s critical to have reliable criteria to determine which loan product is better than another.
Identifying the Ideal Loan Product
There are seven key attributes you can use to effectively evaluate each loan product available on the market. When reviewing a loan product, ask yourself:
- Does it offer a great member experience that’s in high demand?
Just because you don’t offer a loan product doesn’t mean your members don’t want it. They may be going elsewhere for products you don’t offer. Find out what’s in demand in your market whether you offer it or not. - Is it adaptable in a shifting lending landscape?
Being able to control your loan volume based on demand and your risk appetite is crucial during an uncertain economy. - Does it have a low risk of default?
Aside from the obvious benefits of members making their payments, the lower the risk of default on a loan product, the less you have to set aside to satisfy CECL provisions. - Is it time-tested?
New financing requests pop up frequently, but many will not be around for the long term. You need loan products that have survived economic downturns to ensure stability. - Does the term length enable lending flexibility?
Not all loan products enable flexibility to change with the market and many are susceptible to early refinancing by another lender. - Is it unique in your market?
If you’re offering the same products as other lenders, often the only way to compete is on rates. No one wins that race. - Does it deliver above-average returns?
Yield potential is still the most critical component of an effective loan product.
Indirect Vehicle Leasing Delivers
One option that checks all the boxes is indirect vehicle leasing. Indirect vehicle leasing is a bolt-on product that augments your other loan products.
- Leasing yields are 60 to 100 basis points higher than typical auto loan portfolios
- Nationally, lease penetration has been at 30% for three straight years and is expected to remain near that level going forward.
- Millennials have the top leasing penetration of any age group due to the predictable nature of payments
- Lessees have an average default rate of 0.02%, with an average FICO score of 740
- You can gradually elevate your weighted yield at a pace that matches your risk tolerance by replacing auto loans that drop off your books with leases
Credit Union Leasing of America (CULA) has been the leader in indirect vehicle leasing for credit unions for over 30 years. Visit www.cula.com to learn how we empower credit union innovators to diversify their existing loan portfolios, improve yield and expand member services.