Credit unions may not realize it but the summer vacation their members are probably fantasizing about most is a break from paying an auto loan. Skip-a-payment programs or payment holidays, as they are also called, give members the option to forgo a payment by extending the life of the loan one month with interest charges continuing to accrue. At Meriwest Credit Union ($1.04B, San Jose, CA) about 60% of all skipped payments apply to auto loans, making them the number one product to benefit from the program, says chief experience officer Tony Cortez.
Although many credit unions have been offering payment holidays on credit cards and consumer loans for decades, a combination of low interest rates and straitened finances have sparked renewed interest in the programs from members. At America First ($6.22B, Ogden, UT), so many members kept asking around Christmas if there was a skip payment option that the institution recently began promoting the roughly 40-year-old program during the holidays. The summer is the second most popular time for members to request skipping a payment. As a result, many credit unions promote the feature biannually even though members can request a payment holiday any time of the year.
The advantages aren’t all on one side. While borrowers appreciate the financial breather, credit unions benefit from the additional income that the programs generate through interest and fees. Still, cooperatives also place various restrictions to ensure that the programs don’t become a serious risk for both institution and borrower.
Every time members extend their loans out, it puts us at risk too, in case we have to repossess the loan, says Kelley Martin, assistant vice president of consumer credit services with Delta Community Credit Union ($4.63B, Atlanta, GA). The cooperative recently instituted changes to its program, which is at least 15 years old. Periodically evaluating the programs to determine if additional safeguards are needed is essential to their success, she says.
Benefits That Add Up
From a purely financial standpoint, the programs are certainly successful. Randy Halley, senior vice president for branch delivery at America First, estimates that payment holidays generate millions of dollars each year in interest and fees from loans that remain on the books an extra month or two.
Like many credit unions, America First and Meriwest both charge a processing fee, $25 and $35 respectively, to borrowers who want to skip a loan payment. At Meriwest, the processing fee alone generates about $20,000 in income during each of the two seasons when the credit union promotes its skip payment program, Cortez says.
Although the skip payment feature doesn’t help credit unions attract auto loans, Martin believes the program can act as an incentive to stay put for borrowers who are considering refinancing with another institution. Plus, all three cooperatives say offering a financial breather helps keep loans current that might otherwise be sent to collections.
It just gives members a little extra time to get us payment, especially during the holidays, Martin says. Although critics contend the programs teach members poor financial habits, in the long run, members are much better served staying current on the loan instead of having it be delinquent and go on their credit report.
Safeguards To Keep Risks At Bay
Nevertheless, credit unions rely on various restrictions to keep the borrower and institution from landing in trouble. A borrower who uses the skip payment feature too often can quickly end up owing more than the car is worth and negate any gap insurance coverage if the loan balance and car value grow too far apart.
That’s why, at a minimum, credit unions typically limit the number of skipped payments to two a year per loan, with most cooperatives also prohibiting payment holidays for the same loan two months in a row. Meriwest goes one further by requiring that the skipped payments must be six months apart. In addition, most credit unions also require a car title that names them as the loan holder, a detail that might be missed if borrowers refinance from another institution.
From there, cooperatives often add a range of other requirements targeting both the borrower and payment history to minimize the risk. Although some credit unions grant payment holidays only to borrowers whose loan payments are current, America First’s team of underwriters reviews requests from borrowers with less stellar records, deciding each one on a case-by-case basis.
Table 1: How Credit Unions Rein In Payment Holidays
|Meriwest||Delta Community||America First|
|Up To Two Skipped Payments Per Year||✔||✔||✔|
|Borrower Current On The Loan||✔||✔||Exceptions permitted|
|Advance Notice||None||32 days||None|
|Loan Open For Six Months||✔||✔||No minimum|
|No Skips Two Months In A Row||✔||✔||Allowed but rare|
|Limited Skips Per Life Of Loan||None||None||None|
Source: Meriwest, Delta Community, and America First credit unions
Restrictions also get tweaked over time. Last October Delta Community added another qualification for borrowers up to date on payments that the loan must be at least six months old. The credit union introduced the new requirement so that payment holidays wouldn’t mask any ongoing problems with a new loan.Meriwest’s underwriters also review any skip payment request that the automated system rejects. Before granting an exception, underwriters look for other telltale signs of financial trouble, such as a decline in account deposits. Otherwise, the cooperative usually limits payment holidays to borrowers with a credit score of at least 600 who are current on the loan.
It takes 60 days for a loan to be in default, and if you skip a payment, then it’s 90 days, Martin says. That was too long for us to recognize any red flags, and that first payment default is a great indicator of any problems with the borrower.
Even processing fees play a role in mitigating risk.
The fee is meant to be a deterrent, Halley says. There needs to be a little bit of a penalty so that members think about whether it’s really worth skipping the payment.
Fees aren’t the only way to encourage borrowers to check their worst impulses. Delta Community, for instance, doesn’t charge a processing fee, but it does ask borrowers to apply for the payment holiday 32 days in advance.
That allows us enough time to contact the member if we see any problem with extending the loan, Martin says.