Repackage Consumer Loans to Increase Higher-Margin Loan Balances

Thursday, December 9, 2021  |  Jan Trifts

The COVID-19 pandemic has resulted in fundamental changes in consumer spending patterns that, at least for now, continue as we begin to emerge from the crisis. Reduction in consumer spending and the resulting increased savings rate has led to double-digit deposit growth. This, combined with declining year-over-year loan growth, has driven loan-to-deposit ratios and net interest margins to decline significantly. By repackaging consumer loan products, financial institutions can drive additional lending and increase loan margins.

The latest Performance Analytics data from Raddon highlights the continued strong annual double-digit deposit growth of just under 18 percent in June 2021, compared to 5.7 percent in September 2015.

In comparison, year-over-year loan growth fell from a high of 11.1 percent in September 2015 to a low of 5 percent in June 2021. This is an unsettling trend. Deposits are continuing to show strong annual growth while loan growth continues to decline.

The impact of this continuing trend can be seen in an institution’s financial results. Annual loan-to-deposit ratios have declined from a high of 85.6 percent in September 2019 to a low of 72.1 percent in June 2021.

This environment also has put pressure on loan rates as institutions, flush with deposits, compete for fewer loans. As a result, net interest margins have fallen below 3 percent (a decline of 65 basis points since the high in September 2019). Financial institutions are looking for opportunities to increase this margin, and promoting personal consumer loans can help address this problem.

As shown in the table below, personal consumer loans typically provide the second-highest interest rate of any financial institution’s loan offerings after credit cards, with a current average rate of 7.63 percent. Growing these loans is, for many institutions, the best opportunity to increase lending. Are you actively promoting your consumer loan offerings?

Create a Message That Resonates

The active promotion and repackaging of consumer loans can help address the declining loan penetration and margins. Start by moving from a generic description of a consumer loan to providing multiple reasons why a consumer may want a personal loan. For example: include suggestions to address specific needs such as home improvements, landscape projects, weddings, vacations, new baby, adoptions, debt consolidation, medical, unexpected expenses or emergency loans.

Offer Loan Packages for Specific Needs

Consider repackaging your consumer loans to focus on a specific reason, such as a no-equity home improvement loan. Consumers like the simplicity of these loans compared to a home equity product. Some examples:

Genisys Credit Union offers a fast and easy no-equity home improvement loan with high credit limits, flexible terms and low fixed rates.

MECU Credit Union also offers a home improvement loan that doesn’t require equity or other collateral. Members can enjoy the stability of a fixed rate, fixed term and fixed payment with no equity, appraisal or third-party inspections required.

Florida Credit Union promotes its adventure loans. Members can benefit from a low rate with flexible repayment options for motorcycles, boats, RVs and more.

Keep the Competition in Your Sights

We must remember that, in today’s lending markets, competition is coming not just from other traditional financial institutions, but from fintechs and online and mobile institutions that offer new approaches, like SoFi, Prosper or Upstart. Some of these new entrants are highly focused on personal loans, for the same reasons as noted above: a strong margin and high demand.

These institutions use a variety of incentives, such as no origination, prepayment fees or late fees, an easy online application experience and access to live customer support seven days a week. We are even seeing lenders offering rewards in cryptocurrency.

Four Strategies to Build Consumer Lending

When focused on building your consumer lending portfolio, keep these key approaches in mind:

  • Messaging – Be sure your accountholders know about your consumer lending products. Using all your marketing channels, and especially social media, remind them of the myriad ways they can use loans – from household projects, vacations and weddings to unexpected and emergency situations
  • Processes – Ask yourself, “Is my consumer loan process fast and easy?” Many of your competitors, especially fintechs, are offering contactless online loans with electronic signatures and no need for branch visits. Remember, one permanent result of the pandemic is the increased comfort level of consumers with online commerce, including older people who have traditionally preferred in-person approaches
  • Targeting – Be proactive. Use Integrator Advance or another MCIF to identify potential loan prospects by looking for the key characteristics of existing consumer loan borrowers, including their demographics, product usage and balances
  • Make It Meaningful – Offer free credit report reviews to your accountholders to help them identify high interest rate loans or credit card balances that could be transferred to a lower rate debt consolidation loan. Actively promote the simplicity of no-lien home improvement loans – less paperwork, no lien requirement, no appraisal fees and faster availability of funds

As growth in deposit balances continues to outpace loan growth and margin compression remains, financial institutions need to look for loan product offerings with higher margins. Consumer loans, with the second-highest interest rates, provide such an opportunity.

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