Getting Mileage From Small-Dollar Loans

Niche lending helps credit unions build a loyal following while boosting portfolio values.


From financing life-changing events to offering mortgages compliant with Sharia law, credit unions are addressing unmet needs in their communities with an array of niche lending products. The sampling of loans described below are mostly unsecured and for amounts ranging from approximately $400 to $50,000. Typically, they account for just a small slice of a credit union’s portfolio. Nevertheless, the loans diversify portfolios, supplement income, and in some cases attract a credit union’s most coveted demographic — young adults. Mostly, the loans fill a void and help build a loyal following.

The key to doing these loans is knowing your membership well enough to carve out a niche, says Jon Reske, vice president of marketing for UMassFive College Federal Credit Union, which offers a variety of niche lending products, including an auto loan with a reduced interest rate for fuel-efficient vehicles.

“You get a lot of mileage from niche lending because it shows the credit union understands the people it serves,” he says.

Circumventing A Religious Hurdle

Few members present more of a challenge for credit unions to serve than devout Muslims, whose Sharia law prohibits them from paying interest.

Although financial institutions abroad have long offered interest-free car loans and mortgages to Muslim borrowers, North Jersey Federal Credit Union ($221.3M, Totowa, NJ) was the first to do so in the United States through its Islamic banking division, which has other Sharia-compliant products and accounts. The division also avoids investing assets in prohibited commodities such as alcohol.

To get around charging interest, North Jersey structures its loans differently. With mortgages, for instance, the borrower and the credit union purchase the house together, and the borrower buys out the credit union’s portion of the loan over time. Built into that balance is a predetermined fee that roughly equals the total amount of interest the credit union would have charged over the loan’s duration.

Funding A Different American Dream

The cost associated with applying for citizenship or deferred deportation sometimes poses more of an obstacle to immigrants than any legal restriction. Two credit unions, however, are offering micro loans to overcome these financial hurdles.

Working with nonprofit Neighborhood Centers Inc., Promise Credit Union ($4.4M, Houston, TX) lends up to $380 toward the $680 cost of applying for naturalized citizenship. Applicants must be able to put down the $300 difference and pay a $75 loan fee to qualify. In a related product, Latino Community Credit Union ($128.8M, Durham, NC) offers a loan to cover the $465 cost of filing an application under the Deferred Action for Childhood Arrivals initiative. Known as Dreamers, these undocumented youths and young adults who arrived in the United States as children are eligible to apply for temporary legal status. With the help of a parent or family member, minors can also apply for the six-month loan, which carries a 16% rate.

Tying The Knot

When credit unions help finance a life-changing event, usually that means paying for a home or a college education with a mainstream product like a mortgage or student loan. But SAFE Credit Union ($2.0B, North Highlands, CA) targets a third area that few financial institutions consider financing even though the cost is comparable to that of a new car — a wedding.

Getting hitched now costs $28,400 on average, according to the nuptial planning website The Knot, and SAFE lends up to $10,000 for a wedding or honeymoon. The 36-month loan doesn’t require the borrower to own a home or offer any collateral. With fixed rates ranging between 9.9% and 17.9%, the loan has more generous interest-rate margins than many traditional products yet offers a better deal to members than putting the bill on a credit card. Wedding loans helped beef up SAFE’s unsecured lending, which grew more than 5% over the past year.

SAFE is no stranger to niche lending. The credit union provides similar loans for other big purchases, including furniture, home appliances, computers, recreational vehicles, and vacations.

Adopting A Child

Since 2009, America’s Christian Credit Union ($254.4M, Glendora, CA) has helped more than 700 families finance the hefty cost of adopting a child. A domestic adoption can cost as much as $40,000, according to the U.S. government’s Child Welfare Information Gateway, and international adoptions can run even higher.

To help these families in the making, America’s Christian Credit Union offers loans up to $50,000, with interest rates as low as 8.4% and 84 months to pay off the balance. Borrowers may use the funds for domestic or international adoptions, including travel expenses. Members who refinance an existing loan with the credit union may qualify for a discounted rate, and homeowners can opt for a home equity adoption loan that provides longer terms and lower rates.

Improving A Smile

Any parent of a child with braces knows how jaw-dropping dental and orthodontist bills can be. To help members with those costs, Vanderbilt University Credit Union ($32.8M, Nashville, TN) finances up to $10,000 for braces, dental implants, and other cosmetic procedures performed by a doctor or dentist at the Vanderbilt University Medical Center. The 9.9% fixed-rate loan serves as a triple win for the credit union, its members, and its select employee group, which benefits from the additional business.

Getting Better Mileage

To encourage members to be more eco-friendly, UMassFive College Federal Credit Union ($377.0M, Hadley, MA) automatically lowers the interest rate by 25 basis points on auto loans for fuel-efficient vehicles. Any vehicle that is five years old or less and is listed on the website as getting at least 30 miles per gallon qualifies for the discount.

For the college students that UMassFive caters to, there’s a loan for an even greener mode of transportation: a bike. Borrowers repay the $400 loan in nine monthly installments, and total interest amounts to a whopping $5.90. The puny interest drives the loan officers nuts, Reske says, but the real payoff comes four years later.

“Now, the students have graduated and need a car loan so they come to us,” he says. “And because they’ve had the bike loan, they’ve already established credit.”

Pioneering A New Financial Product

Last year, Sooper Credit Union ($272.6M, Denver, CO) ventured where no financial institution has gone before. The credit union pioneered the first loan for powering a home or business through a solar garden, which uses solar panels on the ground to generate power. The gardens offer apartment dwellers, businesses, and homeowners with shady roofs a way to supply all their energy needs from solar panels, which cost $500 apiece. Buying enough panels to completely power a residence or business generally requires between $10,000 and $20,000, money that Sooper is happy to lend.

Since the product launch in April 2012, Sooper has generated $677,000 of solar garden loans, with more pending. The loans are for three, five, seven, or 10 years, with rates ranging between 2.25% and 5.5%.

“It’s pretty competitive these days to get any type of loan,” says Darrell Mann, Sooper’s executive vice president. “But this gives us another lending opportunity.”

The gardens are something of a growth industry in Colorado, which already features several around the state with more being built, and all refer customers who need financing to Sooper. Those referrals typically generate new members. Nearly all of the solar garden loans Sooper has issued so far have been to newcomers who might not have joined the credit union otherwise, says Donna Ogorek, vice president of marketing.

“There’s a huge upside because the demographics for these loans skew younger,” she says. “That’s exactly the type of new member we’re trying to attract.”