Driven by higher total employment and median household incomes, personal loans are expected to continue rapid growth in 2018 after a near 132% increase from 2012. While megabanks, fintechs and alternative lenders continue to increase their share of the personal loan market, TransUnion expects to see more activity in this space by both banks and credit unions as a competitive reaction. The challenge is that loan products tend to all look the same, leaving credit unions with very little to compete on.
Historically, financial institutions and alternative lenders relied on two primary factors when competing for borrowers – rate and speed – and this makes sense given what we know from recent consumer surveys. Studies consistently show that interest rate ranks among the most important factors that influence consumers’ decisions, followed by minimum monthly payment amount. While an exceptional front-end experience and quick lending decisions are also important, they actually are not the real drivers of choice for where a consumer will get a loan.
Regardless of the interest rate or speed, members just want to pay their loans off faster. The challenge is that life happens. While most members may want to pay it off faster and understand that to do so requires paying extra on the loan, they tend not to do so because it’s money they can never get back if they want it later, like paying for an emergency home repair or unforeseen medical expenses.
A take-back loan paired with a modern, elegant mobile interface solves these challenges.
The idea of a take-back loan is to allow members to pay ahead to reduce debt, but take that extra back if they need it, eliminating the fear of parting with “extra money” while also enabling the member to make better financial decisions like paying down debt faster.
If access to a member’s own extra payments or take-backs is important, it’s a short leap to the fact that they may want to see the impact of these changes. A sleek, mobile-friendly dashboard allows them to manage their debt by showing them the loan’s status instantly. The member can also see the impact of payment changes before they make them, giving them more control and enabling them to make better financial decisions.
Consumers really like this concept. In fact, according to a recent study, nine out of 10 consumers prefer a loan where you can take extra payments back over comparably priced loans, and 98% of consumers said they would refinance existing debt at the same rate to get the take-back functionality. When is the last time a prospective borrower told you they would refinance their personal loans with you at the same rate just to have your loan?
Consumers also said they are willing to put more money into a loan and willing to pay more for the benefit of being able to withdraw money when needed. This proves that rate, minimum monthly payments and speed are not the only important factors consumers are now considering.
Best yet, it’s something megabanks and alternative lenders don’t offer. Let’s face it, why would they? It’s a product that’s actually good for the consumer. But for credit unions, it offers something different and unique to talk to prospective borrowers about rather than offering the cheapest and fastest loan product – or just not offering personal loans at all, which eliminates opportunities to foster stronger relationships with existing members and build new ones with prospective members. Furthermore, it’s an idea that aligns with credit unions’ consumer-friendly policies and business practices.
As personal loans grow, there is an opportunity for credit unions to gain a serious edge over megabanks and fintechs. By changing the conversation from rate and speed to talking to members about the ability to take back extra payments and actually see the impact, credit unions can win back market share and offer something that is good for the member. It’s a win-win.
John Waupsh is Chief Innovation Officer for Kasasa. He can be reached at 512-349-4380 or email@example.com.