Microloans make members for life

Imagine you have a member, Bob, who is 30, married with a kid and slowly making his way through the bachelor’s degree he didn’t think he wanted or needed at 19. He’s still writing his midterm paper on the evolution of flagella at 2 am after eight hours at work.

Bob’s almost done, and then his laptop screen goes black. Not even the blue pinwheel of death. Just black.

He explained this to his professor, who, with some skepticism, gave Bob a 48-hour extension.

Now, do you want Bob to come to your credit union for the $400 it takes to replace his computer or a payday lender that will charge triple-digit interest and drag Bob down in recycled debt?

I hope we know the answer to that.

Microloans, which I define as $50-$400, seem small. After all, we call them ‘micro.’

But for your low- to moderate-income members, they’re huge. A microloan can mean the world to them. That’s how your credit union can generate loyalty for your brand.

Your credit union was there for them when they were in financial crisis and likely subsequently more. Welcome them into the fold, educate them and help them improve their credit score so they qualify for larger loans, like cars and mortgages, down the road. Now, what’s the lifetime value of that member?

But microloans are small dollars for the business of your credit union, which is also a reality. They are small and, offered at a reasonable interest rate, there’s little profit to make if you can’t run them on a larger scale due to administrative hassles. They can be difficult to administer, plus traditionally, a large percentage default and collecting is challenging, to say the least.

However, leveraging modern technology platforms can streamline making microloans at scale. Using alternative data—not just a biased credit score—will provide a broader and more accurate picture of your member’s potential behavior. We discovered many more creditworthy borrowers in our foundational research—they just haven’t had the chance to prove it yet. In fact, the model reduced default rates by 75% versus only approving microloan applicants with the highest credit scores.

While the amounts credit union members borrow for microloans aren’t a lot for your credit union, they can be crucial for members. And they can play a critical role in credit unions’ strategy.

First, microloan borrowers are typically younger—a demographic credit unions desperately need to reach. On average, microloan borrowers are around 30.8 years old, with the median age being 29. Additionally, 90% of microloan borrowers are 41 or younger, consisting of both millennials and Gen Z age groups. Among Gen Z microloan borrowers, 29% were 25 or younger.

Many microloan borrowers also have a subprime credit score. Nearly all (94%) microloan borrowers have a credit score of 659 or below. Of that cohort, 67% had a credit score of 579 or less (deep subprime).

Over the decades, the average credit union member has aged to 53 years old today, according to Milestone, while the median age in the US is 39. Credit unions can’t deny that we’re struggling to bring in younger members. As we found, microloans are at least part of the answer.

Second, the new administration has everything under scrutiny—including the tax exemption and consolidation of regulators. Credit unions must be able to defend their status and independent regulatory agency, or the charter will become meaningless when it’s swept together with banks and credit unions fall under the Community Reinvestment Act (CRA).

Credit unions currently don’t fall under CRA at the federal level because it was intended to force banks to reinvest in the areas where they were taking deposits. Credit unions had no such problem, but we also need to continue proving that every day with data. 

As community institutions serving all members in your field of membership, microloans can also help credit unions lend more inclusively. We found that 76% of microloan borrowers live in zip codes primarily occupied by minorities; just 24% are from mainly white zip codes.

For credit unions looking to become or maintain Community Development Financial Institution (CDFI) certification or low-income designation (LID), providing microloans is one way to demonstrate that your credit union complies with these designations' requirements. Microloan borrowers are 26% more likely to be eligible for CDFI or LID criteria. In addition, while credit unions are not subject to CRA, a select few states have their own versions of CRA. Microloans can count toward meeting the needs of the community for CRA credit; these borrowers are 48% more likely to meet CRA criteria.

Offering microloans is helpful for both members and the credit union. For credit union members with lower credit scores and those who have historically been underserved, getting a microloan at a credit union is a much better option than using the predatory payday or car title lender on the corner.

Along with building trust in the community, credit unions benefit from microloans as an additional revenue stream. Employing alternative data helps credit unions make microloans with less risk to the portfolio's overall health. Microloans perfectly fulfill the mission of all credit unions. For many people, a little hand up, as with microloans, is precisely what they need for financial stability in the moment of crisis. Then, your credit union can usher them into long-term financial wellness. Your microloans can make members for life.