Lending and the millennial mindset

A few months ago the internet was awash with the proclamation that avocado toast was keeping Millennial borrowers from committing to a mortgage. Yes, the breakfast of choice for many of the Instagram generation was called out as keeping twenty- to thirty-somethings from experiencing the joys of home ownership. The premise, on the surface, may have had merit—overspending on indulgences while ignoring opportunities to build wealth and personal equity was bogging down this consumer group—but the view was skewed. Every generation has and will struggle with overextending themselves financially. Whether due to a down economy, increasing interest rates, high unemployment, a bubble-busted real estate market, etc., there are challenges across the board with managing personal finances. But there is something beyond an overpriced breakfast that keeps Millennials from adding long term debt to their personal balance sheet. Digging into how this generation addresses their finances, budget, and monetary goals takes more than just broad statements about the most important meal of the day. Let’s take a look at what is shaping this generation‘s buying habits, and how credit unions can better understand the Millennial mindset when it comes to borrowing—whether for a home, a car, or credit card.

The genesis of the term “Millennial” is coming of age at the turn of the century. This is key to defining the Millennial understanding of debt and budgeting. Many saw and experienced firsthand the effects of the crash of the housing market and how the dream of home ownership can quickly become a nightmare due to shifting markets and uneducated financial decisions. Millennials strive to understand more than their parents when it comes to budgeting, investing, and saving. Many are saddled with overwhelming student loan debt due increasing costs for tuition, housing, and cost of living, and their parents’ and grandparents’ lack of financial resources to supplement their college expenses. A competitive job market for entry level professional positions leaves many with less earning power than they would have expected at this stage in their lives.

Millennials are the first generation to grow up with full access to information 24 hours a day, 7 days a week. The never-ending news cycle, the advent of the internet, and the rise of the smart phone has made the Millennial consumer more aware and dependent upon technology and communication than previous generations. This group of borrowers has access to both traditional loans and credit options through credit unions and banks, as well as newer players such as peer-to-peer lending and crowdsourcing and fundraising. Online tools tailored to communicating to a connected audience, such as NerdWallet, Credit Karma, and Credit Sesame provide advice and fiscal education that was previously available only through meeting with wealth advisors and financial planners.

With the constant introduction of new technologies, and an emerging movement of younger borrowers shying away from carrying additional debt on top of what has already been accumulated before entering the job market, the lending marketplaces have changed substantially in the past few years trying to reach the Millennial buyer. Financial institutions are implementing more online tools and mobile applications geared at providing the resources that Millennials are seeking. Savvy Millennials understand the impact that applying for credit can have on their FICO score, and expect to receive offers of credit without a hard inquiry hit to their credit report. Lenders have to work harder and smarter to woo this potentially lucrative, but overwhelmed, market.

Coupled with the challenges that implementing new technology can create, as well as designing a strategy to become a trusted financial advisor to the Millennial market in the midst of so much competition, there are even alternatives to the standard home and vehicle purchase that previously made up a majority of an individual’s “life goal” list. Technology is a prime disruptor of the “status quo,” and there are increasingly more options for consumers who don’t wish to be tied down by a traditional purchase and loan scenarios.

Drive Growth While Navigating Uncharted Waters

With new competitors changing the game, opportunities arise to look for new ways to deliver solutions to a Millennial borrower. Look to some of the newest programs in mortgage and vehicle lending as inspiration to address the challenges being presented:

• Homebuilder Lennar’s mortgage subsidiary recently introduced a mortgage loan offering that helps borrowers with student loans pay down their debt. Eagle Home Mortgage’s Student Loan Debt Mortgage Program can put up to 3% of the purchase price of their Lennar Home (of course) toward any student loan debt they currently have, not to exceed $13,000. The program targets Millennials who are wary of adding mortgage debt on top of large student loan balances.
• SoFi is an online lender that boasts that their underwriting is dependent upon a broader picture than most traditional lenders. By incorporating career experience, education, and earnings potential into their loan guidelines, SoFi (short for Social Finance) is angling to serve the newly graduated, early professional market. SoFi traditionally worked to refinance student loan debt and offer personal loans, but recently has partnered with Fannie Mae to refinance mortgage loans with their Student Loan Payoff ReFi program, which allows borrowers to use a cash-out mortgage to pay down student loan debt.
• Online blog, The Penny Hoarder, shared a story of how 360 Federal Credit Union provided a car equity loan to a recent college graduate in order to pay off his existing student loan debt, and took his interest rate from 6.5% to 2.49% by using the positive equity in his vehicle. While this strategy didn’t encourage the borrower to purchase a new vehicle, the financial institution gained a vehicle loan on their books and the borrower paid $5,000 less in interest over the life of the loan.

In an effort to reach the Millennial borrower, looking beyond the norm for opportunities to lend should be part of every credit union’s strategic planning. By developing programs that are consultative and address specific challenges facing this generation, credit unions can develop long term relationships built on sustainable products and establish themselves as the new face of the Millennial money movement. The Millennial market is looking for leaders to step up and help them reach their financial goals, and essentially understand that their money goals involve more than having enough in their account for tomorrow’s breakfast.

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