Holiday Loans Seek Mix of Debt Ease, Risk Control
With autumn nipping at the heels of the last days of summer, credit unions are already gearing up to roll out their holiday loan programs.
The promotions, which typically kick off around the first of November and run through the New Year, have become a popular mainstay for members looking for a little extra cash to pay for gifts and vacations with the promise that the debt will be paid off by a certain term date.
Part of the lending strategy transformation that took place at the $230 million Texell Credit Union in Temple, Texas, had to do with wanting to better serve a predominantly low-income membership base. In 2013, the cooperative experienced its highest loan performance in its history by offering such products as holiday loans.
“We saw a need for it when we started in 2008,” said Mary Ann Nickolai, marketing manager at Texell. “We’re a low-income designated credit union and a lot of members rely on payday lenders. We wanted to offer an option that was more affordable.”
Texell starts offering its holiday loans in November and December each year. The loans range from $500 to $1,200 and can be repaid over a 12-month term. For the most part, members use the funds to pay for Christmas expenses but some opt to pay off debt, Nickolai said.
In the six years that Texell has been offering holiday loans, the program has become very popular with members. Initially, members had only a $1,000 option. Now, the increments are $500, $1,000 and $1,200.
“In 2008, since people weren't used to this, at first, they thought it was a gimmick,” Nickolai recalled. “Last year, we started offering the loans on Nov. 1, and on that first day, we had over 200 loans.”
During the holiday run in 2013, Texell booked more than 2,200 loans totaling $2.4 million, she added. That's a huge bump since 2008 when 519 loans totaling $519,000 were funded.
While Texell doesn't use a member's credit score and credit history as a factor to determine loan approval, Nickolai said the borrower's average score ranged between 583 and 598 last year. Instead, the credit union looks at a member's loyalty and relationship with Texell, she explained.
“Of course, some loans have defaulted, just like at any other credit union, but they haven't moved the needle higher than our other personal loan products,” Nickolai said.
Texell's loan performance was so strong last year the CUNA Lending Council and CUNA Mutual Group awarded the credit union with its 2013 lending awards in the low- to modest-means category and the consumer loan program for credit unions with less than $250 million in assets category.
“(The) double winner places a high priority on financial literacy and couples that by offering affordable loan products that meet their members’ needs,” according to the judges. “The sales and service culture mantra is treating members fairly and with respect, regardless of their credit affluence.”
The low-to-modest means award recognized Texell's holiday loans, a payday alternative extended, regardless of credit score and its Yes! Loans, aimed at members and potential members previously denied loans.
At the end of 2007, about 22.9% of Texell's members were borrowers, according to the credit union. By the end of 2012, that number increased to more than 51%. At the same time, average loan balances increased from $9,249 to $10,736. Also during that time, Texell went from a centralized lending model to a hybrid, which pushed many loan decisions to the branch level.
Nickolai said Texell plans to offer its holiday loans for the foreseeable future. While the credit union has streamlined the application process by booking the loans in five minutes, the plan in 2015 is to add other enhancements including a self-service channel, she noted. Members would potentially go online rather than having to come into the branch.
Despite how members are applying for loans, credit unions are certainly seeing strong numbers. They added $6.9 billion to their loan portfolios in April as total loans rose to $676 billion, according to CUNA Mutual Group's Credit Union Trends Report. The year-over-year annual loan portfolio gain was 8.9% at the end of that month, the strongest growth since June 2006.
Read more: How Genisys Credit Union funded $1.9M ...
The $1.6 billion Genisys Credit Union in Auburn Hills, Mich., has been offering both summer and holiday loan deals for at least 10 years, Loan Manager Jessica Roshek said.
During its holiday loan promotion that ran from Nov. 1, 2013 through Jan. 31, 2014, Genisys funded 626 loans that totaled just more than $1.9 million, she added.
“While these are marketed as a great solution for purchasing gifts for the holiday season, they are used for various purposes (such as) vacations to escape the cold Michigan weather, taxes, snowmobiles, vehicle repairs, home improvements or repairs,” Roshek said.
For both the summer and holiday loans, the available amounts range between $500 and $5,000. The term is 48 months and for every $1,000 borrowed, a member gets a 12-month period to pay off the loan. The loans are geared towards members with a credit score of 660 or higher, Roshek said.
“We’re rewarding people who have maintained their credit and have done a great job not abusing credit. It's a good strategy for risk management. Generally speaking, if you have a higher credit score, there's a lower chance of default.”
Over the past 12 months, Genisys’ summer and holiday loans had a delinquency rate of 0.52%, a loss of 1.70% and 2.22% total non-performing, Roshek said.
She acknowledged as with any type of loan, there is always the risk of defaults occurring. However, the credit union has channels in place to prevent losses such as automatic payments through direct deposit. Genisys also relies on a member's credit score to determine what rate to charge, Roshek said. Other factors are considered such as has the applicant had other loans with the credit union and have their payments been on time.
“Usually, we have members who will pay down the loan and then take out an additional loan the following year,” Roshek said. “Some will use it to pay taxes. The (holiday loan) is a lower cost alternative to payday lenders or even taking money out a 401(k).”
In addition to buying Christmas gifts, many of the members of the $155 million NARFE Premier Federal Credit Union in King George, Va., are using the cooperative's holiday loans to consolidate debt, said Christine Sparks, marketing manager.
Since at least 2007, when Sparks was hired, NARFE has offered its holiday loans based on the terms of the credit union's standard signature loans. The maximum amount allowable is $25,000 and repayment varies between six and 60 months. NARFE is currently offering a 5.25% rate.
A member's suggestion through the call center prompted NARFE Premier Federal Credit Union to debut a 0% interest rate offer on holiday purchases.
“Members are paying them back on time,” Sparks said, adding most of the members securing the holiday loans have credit scores in the 500 to 600 range. “We have certain guidelines based on credit worthiness and making sure debt to income ratios are where they need to be. We don't want them to overextend their debt.”
In 2013, NARFE introduced an offer that sprang from a suggestion coming through the call center, Sparks recalled.
“She said, ‘I see all of this stuff for new members with intro rates but what about members who have been with you for a long time,’ Sparks said. “After the call, we said, ‘you know, she's right.’”
So NARFE rolled a Visa and MasterCard rewards program for current members that included a 0% interest rate on purchases made during a certain time period. The credit union created and mailed out a fancy postcard thanking them for their loyalty. Sparks said the offer was well-received.
For the upcoming holiday season, NARFE is exploring similar options although nothing has been finalized yet, she added.