As the industry prepares for multiple rate cuts, the implications for credit unions are far-reaching. With multiple cuts anticipated over the next 6 to 12 months, credit union leaders need to consider the strategies and tools that will allow them to pivot in response to a shifting market. For many members, lower interest rates create opportunities to refinance loans, but this isn’t always the best solution. In some cases, lowering their monthly payment to retain them in their current loan may provide better long-term benefits for both the member and the credit union.
Navigating this environment requires more than just reacting to rate cuts. It demands having the right technology in place to make data-driven decisions that align with each member's specific needs.
Auto loans, particularly those acquired through indirect lending channels, are especially vulnerable to refinancing risk when interest rates drop. Indirect borrowers often have a more transactional relationship with the credit union, having obtained their loan through a dealership rather than directly. These members are more likely to be rate-sensitive and shop around for better deals when market conditions shift. If these borrowers refinance elsewhere, credit unions not only lose loan balances but also any opportunity to deepen member relationships.
For this reason, modifying auto loans for these members makes more sense than allowing them to refinance with a competitor. Extending the loan term or lowering the interest rate can help reduce their monthly payments, making the loan more attractive without requiring a full refinancing process. This strategy keeps the member engaged and prevents them from seeking out other options.
Not every auto loan should be modified, and understanding the member’s financial profile is key to making the right decision. One critical factor is the Loan-to-Value (LTV) ratio. If the LTV is too high, meaning the member owes more on the loan than the vehicle is worth, offering a loan modification may not make sense. A high LTV could indicate that the borrower is already upside-down on their loan, increasing the risk for the credit union. In such cases, modifying the loan might not provide enough benefit to justify the risk, especially if the borrower shows signs of financial distress.
However, for members with a lower LTV and a solid payment history, offering a retention modification can help them lower their monthly payment and prevent them from refinancing with another institution. This approach allows the credit union to retain both the loan and the relationship, ensuring a win-win outcome for both parties.
It’s important to recognize that not every member is best served by refinancing. In some cases, a retention modification may provide a more tailored solution that better aligns with both the member’s financial situation and the credit union’s risk management goals.
Refinancing involves issuing a new loan, often with a lower interest rate or different terms, which fully replaces the old loan. This option is ideal when market conditions make new loans more attractive for both the credit union and the member, particularly for longer-term loans like mortgages or home equity loans.
However, modifying the loan can be a more flexible option, allowing credit unions to adjust the terms of an existing loan without the administrative overhead or the need for a full refinance. For example, in cases where a member has a solid payment history but may be facing short-term financial stress, extending the loan term or reducing the interest rate without a formal refinance can provide relief without significantly impacting the credit union’s balance sheet.
For shorter-term, secured loans like auto loans, restructuring can also be a more efficient way to retain members. Since these loans are typically backed by collateral, the credit union can lower the member’s monthly payment through a term extension or rate reduction without assuming significant additional risk.
The ability to pivot between refinancing and restructuring is only possible if credit unions have access to robust member data and the tools to act on it. This is where platforms like Constant become crucial. By pulling real-time data from the core system, credit unions can assess each member’s unique financial situation—looking at factors like payment history and previous modifications, such as payment skips or deferments. This analysis, together with LTV, the number of months remaining in the term and the outstanding balance, can help credit unions determine whether to send the member down the path of a refinance or a retention modification.
A rules-based platform like Constant’s allows credit unions to automate these decisions, ensuring that members are offered the best options as rates drop. For some, a refinance will be the right choice, while others may benefit more from a loan modification that lowers their monthly payment without requiring a full refinancing process. Having the ability to offer these options directly within digital banking versus on an external site - with real-time access to core data - ensures a seamless member experience and reduces the operational burden on staff.
With multiple rate cuts likely on the horizon, credit unions must be ready to offer solutions that align with both market conditions and individual member needs. Having the right tools in place to access and utilize member data—whether to refinance or restructure loans—is no longer optional. It’s essential for maintaining member loyalty, preserving loan balances, and ensuring long-term financial health.
Constant helps FIs create new revenue streams by automating loan servicing and continuously offering relevant products in digital channels. By moving common servicing tasks to digital banking, FIs empower their customers to resolve requests online thereby reducing call volume and operational costs. Constant helps FIs improve their bottom line by driving new fee and interest income from real-time, relevant product offers and boosting efficiency.
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