Why Signature Loans Get No Respect

Signature loans are offered by the majority of credit unions across the nation, but it's hard to tell from the marketing of this traditional CU product.

"Signature loans have perhaps been under-loved by the mainstream consumer finance industry in recent years," said Jason Osterhage, SVP of lending at Chicago's Alliant CU and a member of the executive committee for the CUNA Lending Council.

Osterhage said that signature loans frequently take a back seat to credit cards, which "are easier to market, generate multiple evergreen revenue streams, and can create stickier banking relationships."

That means credit unions will likely continue to focus on credit cards and more innovation in that space, according to Osterhage.

But signature loans are not a dying breed — and some say they may be one of the best bets for CU loan growth in 2014.

Speaking to Credit Union Journal earlier this year, marketing consultant Paul J. Lucas noted that "lifestyle loans," such as loans for weddings, orthodontics and more, are where the biggest opportunities lie. Whether they're billed as signature loans, personal loans or lifestyle loans, the end product is the same — an unsecured, closed-end loan.

Signature loans are even one of the most popular loan offerings at many credit unions--at least once a year. Holiday loans to help families pay for gifts are routinely offered at a multitude of credit unions, and often receive a strong response from members who look for that product every year. The trick for many CUs, however, is finding a way to expand the popularity of signature loans beyond just the holiday season.

Challenge Or Opportunity?
In the days before widespread use of credit cards, members might obtain a signature loan to buy air conditioners, furniture or other high-ticket items. These days, many consumers just charge those purchases — particularly when shops such as Home Depot and other retailers offer rates as low as 0% if the purchase is paid off within a certain time frame.

That presents a challenge for some credit unions, but Brett Christensen, owner of CU Lending Advice, noted that it also presents a great opportunity.

For members with A paper, they don't need to rely on the credit union — they can get the 0% rate from the captives. It's those with less-than-perfect credit, said Christensen, that CUs should be focusing on.

"Our industry was formed to serve the underserved," said Christensen. "Take the billion-dollar credit unions out of the picture, and we serve the working class. We don't serve the wealthy, sophisticated folks. Twenty-five percent have credit scores under 600; 35% have scores over 750, and so that group of over 750 can do whatever they want with their big limit credit cards. But the working class doesn't have those big limits."

Silver State Schools' Success
One institution that has found success in the sig loan space is Las Vegas' Silver State Schools Credit Union. The $637 million-asset CU booked more than $3 million in signature loans during 2013, more than 30% of which came from members with credit scores between 640 and 719 — and that's not including the 13.48% ($377,000) that came from pre-approved loans such as its "Classroom Supply Loan" or loans to help educators pay for specialized certifications.

"People are looking to use their loans more as a financial planning tool, and looking to amortize debt and get away from open-ended credit," said Steve VanSickler, VP and chief credit officer at Silver State. "A number of consumers don't want to carry another card, and rather than use Home Depot's financing or the furniture company's financing or the like, they're attuned to 'I don't want to apply for more credit; I don't want more solicitations to do more things.' "

Christensen echoed that premise, noting that a signature loan, unlike a credit card, "isn't a temptation; it's not a weapon. It actually pays down and you retire the debt. A lot of people can't handle credit cards — they just spend up to their limits. It's an underwriting strategy where you can go to somebody who may not be impeccable in managing their credit and give them a $5,000 signature loan that pays down, rather than a $5,000 weapon that pays forever."

Biggest Opportunity?

But those "weapons" may be credit unions biggest opportunity in signature lending — or, more specifically, helping members get rid of them.

Rex Johnson, founder of Lending Solutions Consulting, said that debt consolidation is where the biggest growth opportunities are right now — especially if a credit union is willing to take a risk. He said that too many CUs right now aren't willing to make loans big enough to cover the amount of credit card debt that consumers have.

"The fact that people aren't making these loans because they're afraid to make them is creating a huge opportunity for the ones that know how to do it the right way; put them on the books, and they'll make a lot of money," he said. The chief problem, is that CUs are too focused on credit scores, ignoring the fact that many members in need have good jobs and make money, they just have poor credit.

"We're chasing the wrong business," Johnson said, noting that even before the Great Recession too many CUs weren't going after a broad enough range of credit scores.

Many of those interviewed for this story noted that there's no sweet spot when it comes to making signature loans.

But while CUs of any size and field of membership can make them and find success there, they said, those with a deeper understanding of their membership may be better poised for success.

What's just as important, many said, is a credit union's appetite for risk — along with its willingness to lend to those with less-than-perfect credit.

Brett Christensen of CU Lending Advice noted that for smaller CUs — in the $50 million-asset range — a $15,000 limit on signature loans may be okay. "At billion-dollar credit unions I say you have to have $50,000 [limits] available to compete."