Despite the apparent financial pain to cover the underwritingcosts of small loans under $600, some credit unions still feelthere is a segment of their membership that rely on this type offinancing.

However, the market for smaller loans may be shrinking ifresearch from a new CUNA Lending Council white paper is anyindication.

According to Fighting for Our Turf: Threats to Credit Union LoanMarkets, credit unions used to make more unsecured loans for smallticket purchases like furniture, jewelry, and electronic equipment.A large portion of that market has migrated to credit cards, whichhave become so pervasive that unused credit lines are typicallydisregarded in underwriting loans.

“The small loan market has become overcrowded and highlycompetitive. This has contributed to a limping credit union loanportfolio,” Jim Jerving, the white paper's author, told CreditUnion Times.

Jerving said the research found that most members are unwillingto pay a higher rate on payday loan alternatives offered by creditunion when they can get a better rate on a credit card, which mightbe another reason why small loans are not as prevalent.

“Credit unions are also constrained by membership requirements.They must limit their loans to their field of membership. It isdifficult to get the scale needed to be profitable, since only asmall segment of members want these loans,” Jerving said.

The Great Recession of 2008 also led to consumers wanting to paydown debt and save more.

Proof of that the trend can be found in the number of homeownerstapping into their home equity for cash-out-refinancing, Jervingsaid. The amount of equity taken out by homeowners increased from$26 billion in 2000 to a high of $321 billion in 2006. During thehousing and financial crisis, that number fell, but even with arecovering housing market and still stagnant economy, only $29billion was recorded in cash-out-refinancing in 2012, he said.

Increased competition and consumers still cautious to borrowhave resulted in a credit union industry loan-to-share ratio of66.3% for the first quarter of 2013, Jerving said citing CUNA data.At the same time, the net interest margin for the same time perioddropped to 277 basis points, which is as low as it has ever been,he said.

Despite apparent roadblocks, small loans can continueto be a viable area for credit unions, Jerving found. Some lendersare moving toward a more holistic underwriting approach that takesa closer look at willingness to pay rather than focusing on thecredit score.

“There are a number of credit segments that are being avoided.These are people who suffered credit problems, but were victims ofjob lay-offs and other misfortunes of the Great Recession,” Jervingsaid.

In Montana, credit unions continue to offer small loans to meetthe needs of their members and communities, said Karen Smith,executive director of Montana Credit Unions for CommunityDevelopment in Helena, Mont. A few years ago, the office conductedan awareness campaign focused on educating consumers about smallloans available at credit unions across the state. While hardnumbers aren't available on usage, Smith said the lending landscapehas changed.

“A couple of years ago, the payday lending industry in Montanahad the rates capped and we saw the payday lending store frontsclose across the state,” she said. “However, the online paydaylenders continue to target consumers in our state.”

Still, she said there is an opportunity for credit unions tobuild awareness as many consumers and members aren't aware thatsmall dollar loans are an option at their credit union.

Ben Rogers, research director at the Filene Research Institutein Madison, Wis. said he thinks there is still a place for personalloans in the credit union product mix.

“I think they work best as second-chance or starter loans formembers who would benefit from personal interaction,” he said. “ButI think a lot of credit unions have to make strategic tradeoffs andcut or at least underemphasize the less productive parts of theirloan portfolios.”

Personal loans, which are unsecured and have to be underwrittenand disbursed, takes employee time, Rogers said. A $5,000 vacationloan, even one written at 10% or 12%, takes a lot more effort forthe member and for the credit union than using a credit card thatcan get the same job done, he explained.

“It takes a lot of $5,000 vacation loans and $2,000 computerloans to make a dent in any credit union's lending portfolio,”Rogers said. “I think a lot of credit unions say to themselves,'why would I chase 100 personal loans if I could just book oneextra mortgage for the same amount?'”

Next Page: Accounting for ConsumerDemand

That doesn't even account for consumer demand, Rogers noted.Most members who would qualify for a personal loan already have acredit card anyway and may not want to make the effort to apply foranother loan.

Dave Colby, chief economist at CUNA Mutual Group, said theinterest rate differential back in 1998 revealed that unsecuredloans were priced 51 basis points above credit card rates. Today,the spread has increased to 157 basis points.

The bottom line is credit cards are more convenient and havebetter terms, he said. During the past 15 years, the credit unionshare of the credit card market has increased from 3.3% to itscurrent level of 4.9%. And that gain in market share is understatedas some credit unions have sold their credit card portfolios, hesaid.

Additionally, Colby said credit card teasers like 0.00% interestand no payments for a limited term have helped move the product inthe same way such teasers have worked for vehicle financing.

As for the use of credit cards as a substitute for small dollarloans, Colby said credit union credit cards balances were up $21.6billion or 116% over the past 15 years, while unsecured loans wereup $4.6 billion or 20% during the same period.

Meanwhile, another area where credit unions may have anopportunity to regain traction with their small loans is throughpoint-of-sale transactions, Jerving said.

“The consumer no longer wants to go to the financial institutionfor small loans. He wants the loan immediately at the time ofpurchase,” Jerving said. “This is emblematic of the Americanculture of immediate gratification in all things carrying a pricetag.”

For credit unions, a market opportunity may exist forinstallment loans for POS purchases at jewelry stores, homeappliance and furniture stores, as well as dental offices andelective surgery centers, to name only a few options, Jerving said.The online capability exists to make POS happen effectively andrelatively easy for the consumer, he suggested.

If a small loan comeback is possible, credit unions may see yetanother way to help members.

“I do see an opportunity for members stuck with high-interestrate revolving debt,” Colby said. “Start a promotion to refinancethat debt away to credit union credit cards. Members took the easyloan—financed the purchase on the spot—now improve your finances bygetting the best loan at your credit union (as) rates have neverbeen lower.”