Good credit risk management isn't about saying no to all risky loans – some risk is inherent in the lending business. It's about understanding the risk the institution is taking and making sure it's getting paid enough for it. When credit unions don't have a clear picture of their risks, losses can hit harder than they should.
Tip 1: Stay Ahead of the Danger Zone
Here's a pattern most auto lenders see: Defaults tend to spike between 14 and 24 months after a loan is booked. That's the danger zone. If your collections team isn't reaching out to struggling borrowers before that window, your credit union is already playing catch-up.
Credit unions that manage losses well are watching for early warning signs – missed payments, changes in behavior – and acting on them months before the default would ever occur.
Over a loan's life, there is a point when it reaches its highest default rate. After this peak, that loan's likelihood of defaulting decreases. This dynamic should change how we manage that risk. Or if you are buying a participation loan it also presents opportunities.
Tip 2: Look Beyond Credit Scores
It's also critical to remember that a credit union can't evaluate risk by looking at just one thing. Credit scores do matter, but so does loan-to-value. A member with a 680 score and 130% LTV presents a very different risk than a 680 score at 90% LTV. Think of it this way: A borrower who gets a $13,000 loan on a vehicle worth $10,000 is in very different circumstances than someone who borrows $9,000 on that same vehicle. The two may appear similar on paper and often even receive the same rate, but the member at 130% LTV has a 1.5 times higher likelihood of defaulting. When you map out default rates by both credit score and LTV together, your credit union can better see where actual concentrations of risk are hiding.
Tip 3: Don't Forget Car Value Trends and LTV
Think back to 2022 and 2023. Car values were sky-high and many lenders, including credit unions, expanded the loans and borrowers they approved. At the same time, losses appeared muted because recovery values on repossessions were also elevated. When a credit union repossessed a vehicle, they likely weren't losing as much. This created a deflated perception of risk. But the problem wasn't necessarily loose underwriting – it was that inflated vehicle values made LTVs look reasonable when they really weren't. When car prices came back down to earth, those loans went underwater fast. That's why so many lenders tightened their credit boxes in early 2024. They felt those losses and reacted.
It's also important to know where your institution is in the loss cycle. I often hear credit unions say, "We're seeing a lot of charge-offs right now." But is it really a lot? Compared to what? Loans originated in 2022 will behave differently than loans from 2021 or 2024. Before your credit union panics, compare your losses to the right benchmark – similar loan types, similar time periods, similar credit tiers.
Tip 4: Don't Hurt Your Returns to Avoid Risk
In trying to reduce or avoid risk, some credit unions end up actually hurting their returns. For example, one institution pulled back from lower credit scores entirely after seeing elevated losses. Sounds reasonable, right? But here's what happened – they ended up with a portfolio full of prime borrowers who pay lower rates and refinance quickly. Those "safe" loans actually generated worse returns than the riskier loans they walked away from, because the riskier loans were priced to account for that risk.
Tip 5: Risk Isn't the Enemy. Mispriced Risk Is.
That's the key insight: Credit risk isn't bad if your credit union is getting paid appropriately for it. A loan to a 650-credit-score borrower at the right rate can be more profitable than a loan to an 800-score borrower at a thin margin. The data often shows that middle-tier credit scores – when priced correctly – deliver the best returns after accounting for losses. Prime borrowers default less, sure, but they also pay off faster and earn your institution less along the way.
So, what does effective credit risk management look like? It means watching for trouble early – before that 14-month mark. It means looking at everything that contributes to risk together, not in isolation. It means comparing losses to the right benchmarks before making big changes. And most importantly, it means making sure your credit union's pricing reflects the risk it's taking.
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