The problem with signature loans is simple, says Glenn Bryan, senior vice president of Legacy Community Federal Credit Union ($398M, Birmingham, AL). They don’t really capture the typical member’s imagination. Members don’t really see the value in signature loans or why they should care about them, he says.
Plus, as the economy staggered, spending stalled. The number of home sales in Birmingham averaged about 1,000 per quarter in 2009 before falling in 2010 and 2011; sales grew only slightly in 2012 and 2013, according to City-Data.com. Household income also stagnated. The city’s median household income of $28,626 in 2011, the most recent data available, was well below that for the state, which was $41,415.
Birmingham’s struggling economy took a toll on Legacy’s loan portfolio. According to Callahan & Associates’ Peer-to-Peer data, since the fourth quarter 2009 Legacy’s total loan portfolio dropped 17% to roughly $131 million — well below asset-based peers at $214 million, though above the state-based average of $67 million. Even as of March 2013, the credit union’s loan to asset ratio was just 30.75%, according to Search & Analyze data on CreditUnions.com.
“As we were looking into what we could do to grow our loan portfolio, we started thinking about what we have already in the portfolio that’s just not being used” Bryan says.
That’s when Legacy had the idea to reestablish its signature loans. It already had the ability and experience to make these loans, though members seemed mostly unaware of the product. After a rebranding effort that bundled the loans into one easily identifiable product, the Legacy Lifestyle Loan was born.
Legacy’s Lifestyle Loan
Legacy introduced the loan in April 2013 to coincide with the credit union’s primary sponsorship of the Indy Grand Prix of Alabama, an IndyCar Series race held in Birmingham.
The Loan page on Legacy’s website lists 27 common expenses that individuals and families typically have over a lifetime, such as weddings, vacations, and home improvements. These three reasons account for most Legacy Loans, though the institution will approve loans for everything from funerals to Lasik surgery to veterinary care.
“People started to realize, ‘I’m planning a wedding, I’m going on vacation, I’ve got to have eye surgery.’ Whatever those different things are — which really speak to the member’s lifestyle — people started to realize, ‘Hey, I could get a loan for that,” Bryan says.
The unsecured loans are targeted principally toward members with young families or those just starting out, who often don’t have enough savings for a wedding, a honeymoon, or a vacation. Although Legacy hasn’t targeted any of its select employer groups with these offerings, Bryan says, the goal is to appeal to broad swaths of the membership base.
Although also offered with an open-ended term, the loans usually have a 36-month duration. Rates are based on the borrower’s credit profile, including the ability to repay as well as the person’s income and debt ratios. Then the credit union looks at the likely total expenditure for the purchase before determining the loan balance. For example, a wedding in Jefferson County, AL, runs between $17,000 and $28,600 on average, according to costofwedding.com.
We try to get them enough funds to do what they want but still keep the loan payments reasonable so that borrowers will be able to repay the loan, Bryan says.
A New Marketing Strategy
Although the loans have always been around, the marketing strategy Legacy used was uninspiring and needed updating to capture the membership’s imagination. So the credit union began considering ways to market the loans differently. The solution was to present the newly renamed Legacy Lifestyle Loan as an alternative to high-dollar credit card purchases.
“Some of the credit card rates that people have might be up into the high teens or twenties,” Bryan says. “If you can get a loan for 10% on a fixed term and you can segregate that expense and say, ‘Okay, this is my loan for the new deck or my new air-conditioning system,’ people looked at that and thought, ‘Hey that’s a good idea.’”
Legacy has heavily marketed its product over the past year, leveraging all of the media outlets it can find. Besides the yearly IndyCar race, Bryan says, the credit union has found success advertising on local radio stations where it sponsors several 15-second traffic reports.
“We’ve really saturated the market, and the catchy product name helps because Legacy Lifestyle Lending sticks in your mind,” he says.
To continue expanding its loan portfolio, Legacy is currently working with local businesses and retailers, educating them about the benefits of the Lifestyle Loan. If the strategy pays off, the businesses would refer their customers to the credit union for financing an unexpected or once-in-a-lifetime event.
Risk Versus Reward
The credit union does take on greater risk with these unsecured loans. However, so far the credit union has seen little in the way of defaults or charge-offs even though the loans have a higher delinquency rate — 1.2% — than the rest of Legacy’s portfolio. According to Search & Analyze data, Legacy’s total loan portfolio has just a 0.37% delinquency rate, significantly lower than the average of 1.37% for its state peers.
“1.2% is very manageable and lower than you’d expect for a totally unsecured loan product,” Bryan says. “And losses have been minimal.”
Bryan estimates the credit union has made $1.5 million in Lifestyle Loans since the program began last April. According to Search & Analyze data, in March 2013, Legacy held slightly more than $4.5 million in other unsecured (noncredit card) loans, with an average balance of $800. By December, the last reporting period in which data were available, those figures were $6 million and $940 respectively.