The subprime lending market might be frightening to some credit unions, but it represents a huge growth opportunity in the coming year. Credit unions have a unique ability to provide loans to individuals that many larger banks would avoid, and this offers them a competitive advantage that can lead to tremendous expansion.
Loans to the underserved on the rise
A new study conducted by the Center for Financial Services Innovation discovered an uptick in the number of underbanked and underserved individuals paying financial fees and interest throughout the last year. This indicates that the number of underserved people who are seeking and receiving loans has grown substantially, and financial institutions will need to acknowledge these individuals if they want to maximize their potential for growth. The amount paid in fees shot up more than 7 percent in the past year, and reached a total of $103 billion. While that level of growth will not be sustained, the CFSI anticipates that the coming year will bring an increase of 4.6 percent.
"The past 12 months have represented a significant rebound for the car industry."
Subprime auto loans contributed to much of the growth in this sector, and it looks like they will remain strong through 2015. After a recession that curtailed consumer spending and resulted in stricter lending requirements for borrowers, pent-up demand for autos is finally being relieved. Already, some are projecting that 2015 will be a record-setting year for vehicle sales, according to CNBC, and the past 12 months have represented a significant rebound for the car industry.
Credit unions likely to benefit
While large banks aiming to minimize their risk may turn away customers who are unable to meet their strict lending requirements, credit unions are capable of providing those consumers with subprime loans that will help them achieve their financial goals. This is because the more communal nature of credit unions makes it easy to support riskier lending prospects.
It's clear that many credit union executives are prepared to capitalize on their advantages for future loans. In a survey from TransUnion about trends for 2015, nearly half of those surveyed said they expected the majority of their growth to come from an increased number of auto loans. The current delinquency rate for auto loans is still low, at around 1.16 percent, according to TransUnion, so these loans are not particularly risky for credit unions overall. Credit unions have the ability to work with members to maintain these loans for their duration.