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Loans are inherently risky business (but without Tom Cruise). Credit unions who want to expand their loan portfolio must also assess the kinds of risks those loans pose to their bottom line. However, credit unions without loan portfolios miss out on income opportunities that increase their margin. So, what kind of risk is there in quick click loans for credit unions?
The simple fact of the matter is that yes, quick click loans do increase a credit union’s loan risk. Do the risks outweigh the rewards? Or are the benefits of offering short-term, small-dollar loans too good to pass on?
1. Member Authentication Risk
The nature of online, quick click loans is that loan officers can’t verify their identity in person. When handing over hundreds or thousands of dollars, credit unions will want to know they’re lending that money to the right person.
We live in a world where there are entire movies and TV shows dedicated to mistaken or falsified identities online (Catfish, anyone?). As such, any financial transaction on the internet deserves robust authentication procedures.
Quick click loans online need strong authentication protocols to ensure that people are who they say they are. Some turnkey lending platforms for credit unions have very safe and efficient member authentication practices. For example, QCash uses the same authentication mechanisms for quick click loans as credit unions use for online and mobile banking.
Credit unions can reduce their member authentication risk by using the same rigid member authentication mechanisms as they do for other services. Or, they can partner with a
2. Underwriting or Credit Risk
Online quick click loans pose credit risk to credit unions by increasing loan portfolio size. In that sense, credit unions must give respect to small-dollar loans as they do to their larger ones. Fortunately, quick click loans are small. Credit unions limit their risk exposure by not doling out massive sums of money through small-dollar lending.
Strong underwriting practices mitigate a large amount of credit union loan risk. For short-term lending, credit scores don’t always paint a clear picture of a person’s creditworthiness. Credit unions who look beyond FICO scores may be better able to determine a person’s ability to repay a loan.
Loan underwriting is also one of the first things that NCUA examiners look at during risk assessments. If you want to stay on the good side of your NCUA auditors, you’ll need to determine what impact quick click loans will have on your NCUA audits.
3. Higher Interest Rates
Nobody likes high interest rates. Unfortunately, in the quick click loan marketplace, they’re a necessity. The fact of the matter is, the loss rates on quick click loans are higher than with traditional personal loans.
Conversely, high interest rates offset a lot of the risk inherent to small-dollar lending platforms. Not only that, but their rates are far more manageable than what payday lenders charge. In some states, credit union quick click loan interest rates are 1/20th of their competitors’.
Lower rates from credit unions help members maintain solvency without capitalizing on their financial vulnerability. The high interest rates of quick click loans merely cover risks posed to credit unions—they don’t contribute to harmful debt spirals the way that predatory lenders do.
Risk vs Reward
Ultimately, credit unions who offer quick click loans see numerous benefits. Foremostly, they expand their list of critical member services to help their most cash-strapped members. They also increase their margin through broadening their loan portfolios.
Other financial institutions are beginning to enter the quick click loan marketplace. Credit unions who don’t plan to offer small-dollar lending services may see another kind of risk: being left behind in the member services arena.
There is demand for short-term lending solutions. Credit union members who need quick click loans may find them elsewhere. Credit unions must decide for themselves if that’s an acceptable risk.
Next Steps for Credit Unions Interested in Small-Dollar Lending
If you’d like to read more about how small-dollar lending affects credit unions, follow the links below. If you’d like to see how quick click loans can help members in emergencies, download our Member Crisis Guide.
Check out some of our other blogs here:
- What Level of Staffing Do I Need for My Credit Union Small-Dollar Loan Program?
- Overcoming Potential PR Issues from Credit Union Small-Dollar Loan Programs
- The Member Segments Most Affected by Credit Union Small-Dollar Loan Programs
- Measuring the Success of Your Credit Union’s Small-Dollar Loan Program
- Best Practices for Marketing a Credit Union Small-Dollar Loan Program