As a community-based financial institution, your primary goal is to create better lives for your membership. Reducing stress and struggle with finances is the most effective way to do so. Thus, financial empowerment.
This is part of a category of articles looking at ways your institution can empower members through your varied services. Here we look to your loan protection products. Yes, boosting profitability on auto loans can also empower your members. Learn how below.
Financial Education Starts the Journey
Like most, your institution provides some form of financial literacy education. The goal is to help people manage their flow of money so the ratio of funds in to funds out remains positive. In other words, making money.
We all know that helping people build a budget is the most important educational strategy you can provide. From there, offer simple tools to manage it within your online banking (or mobile app) that integrate with your account features.
People using your services can enter, or determine, their monthly income, then use bill pay, transaction history, and manual addition to create an assets/liabilities list. Of course, it’s got to be easy.
From here, well, you know how it works. There’s going to be recommendations to reduce unnecessary spending and also “pay yourself first” with automatic transfers from paychecks. It may also include guidance on consolidating loans and refinancing others for lower rates.
Savings goals, loan payoff priorities, and spending strategies will all get “set in pencil”. I say pencil because things can change. Saving for things or the life you want can quickly turn into spending for things you need, because despite best laid plans, stuff happens.
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Savings and Life in the Way
As a financial institution, you’re helping people build a virtual piggy-bank. It’s easy to drop change in, but getting money out is a bit harder. They’re purposely built with no opening. It encourages saving while discouraging unnecessary “withdrawals”.
Of course, emergencies take precedence, and you probably know someone who had to break into their trusty jar, pig, or other saving container. For larger amounts, you encourage people to use your savings accounts. Thus, no hammer needed.
Either way, the end result is the same. That savings goal just got further away. Worse, your member may need to borrow money, whether through a credit card or unsecured personal loan. Both have high interest rates, making it expensive to be without money.
That’s assuming they don’t have to go to a check-cashing store or other high-rate alternative lender.
With new expenses and diminished savings, the plan your financial education helped them build is now even less likely. Downward financial spirals are a real problem.
That’s not cool. But your team is in a unique position to help prevent this scenario. Which is pretty cool. You can empower them financially, leading to better lives. And this is possible with the products your institution already has.
Before we look at how your existing loan protection offerings complement empowerment efforts, we need to recognize why financial plans can fall short, or just fail.
“You Know What” Happens
Bad things can happen to good people.
According to Nielsen data, the American Payroll Association, CareerBuilder, and the National Endowment for Financial Education, somewhere between 50 percent and 78 percent of employees earn just enough money to pay their bills each month.
In other words, more than half of Americans live paycheck-to-paycheck.
Should they miss one, or incur an unexpected expense, it’s possible bills go unpaid. And those in tough financial situations already have lower credit scores, making borrowing more expensive (or maybe not even possible).
Plus, once one bill is past-due, it’s easy to get caught up in the cycle (Notice that concept keeps coming up?).
The data shouldn’t come as a surprise. You already know that only about half of Americans can weather a $1,000 emergency from savings alone. Another 37% would grab their credit card, take out a personal loan, or ask family for help. And that data is pre-COVID.
So, together, what does this tell us?
Financial plans are vulnerable. Even with disciplined budgeting, saving, and spending, just one unexpected event or emergency can make the whole house of cards come tumbling down. A lifetime of great choices can be undone in an instant.
You recognize that financial literacy guidance exists to empower people. Yet knowing the best thing to do and needing to do another thing is not a failing on their part. But the result is the same: Their financial dreams (and the life options it unlocks) disappear.
Sidenote: This is a good place to reference an article my alter ego, the Credit Union Geek, wrote about standing up for the credit union mission. In more ways than you typically think.
Risk Management Is Financial Empowerment
Financial plans must take into account the risk of an unexpected event. Of course, when you have little “extra”, planning is fine, but taking real action is another story. Many risks can be offset by other assets or insurance.
What are some of these events?
- Death or disability of the breadwinner(s)
- Car crash/totalled vehicle
- Mechanical breakdown
- Involuntary unemployment
Sadly, we know from previous data that most of your account holders have insufficient funds to just pay for dealing with these occurrences. In other words, “other assets” is not an option.
As such, any of them can start (or exacerbate) a cascading series of financial failures spreading throughout a household and sometimes even into the community as a whole (There’s that downward financial spiral again.).
Let’s take a common example, especially given your auto loan portfolio is predominantly used: A costly mechanical repair to remedy a vehicle breakdown. This scenario is more than just a money equation. It’s a risk to the entire family function.
When your primary form of transportation is no longer available, jobs are at risk. Bringing children to school (because home-schooling is likely not an affordable choice) and other necessary movements, including regular medical care, may also be lost.
Sidenote: Sure, there’s ride-sharing and public transportation, but we all know that the former is an expensive way to move around and the latter may not adequately serve someone, based on a wide range of factors.
We could also mention the higher chance of the loan becoming delinquent, which has massive economic impacts on the borrower (as well as hurts your institution).
And that’s just from a mechanical breakdown. What if the challenge was far greater?
This is where your Protection Products can literally change lives and provide financial empowerment.
Assisting During Life-Changing Risks
As far as “life-changing” goes, the biggest are death and disability. Statistics indicate that most Americans, even if they own life insurance, are underinsured. And there are even fewer individuals insured for non-occupational disabilities (ie. getting hurt or sick off the job).
Here’s where presenting Payment Protection during your loan process is so important. They have unique advantages to help borrowers, one of which being Guaranteed Issue. You know up to 129 million Americans have some sort of pre-existing medical condition.
Even though pre-existing conditions cannot make health insurance more expensive (if they have any), it can exclude coverage or raise the cost on individual insurance.
Medical history is not considered for life insurance products under the Payment Protection umbrella. Plus, the underwriting for disability coverage may be more lenient and thus easier to access. So your borrowers and their family have a safety net if bad things happen.
How many of your borrowers think “life insurance” when they’re buying a car? That connection is up to you.
Vehicles and Financial Empowerment
These protection products fall in line with the ones you recognize most. Chances are, GAP is a “bread and butter” offering for your institution. And it should be! With a robust offering platform, you can show borrowers the estimated “gap” in an easy-to-read chart.
Our friends at Frost Financial, a GAP provider for over 1000 institutions, regularly discuss claims of $3,000, $5,000, or even $10,000. Those are life-changing…and institution-protecting.
Typically the next product on the menu, whether in your loan process or at a dealer, comes VSC. You know your own services come at a massive price advantage over the F&I departments, already a form of financial empowerment.
And then, of course, is the protection a VSC provides for all parties. We won’t cover that again here; you know our position on its importance to keep the loan payment current and the borrower in their (working) vehicle.
On top of all this, you know that the sales of these products will generate substantial non-interest income. Even as a not-for-profit financial institution, you need revenue to operate. But is this your main priority?
Are Your Sales Mission Focused?
Think back to your last protection product training. If your institution is like most, your vendor brings in a trainer (or schedules a Zoom session), and you focus on driving income through learning to properly present, answer objections, and close deals.
You’re working on “building a sales culture”.
Which is important. I mean, if you can’t present your protection products, no one gets them, and is that good for anyone? Not to mention it’s a tough way to generate income. But is making money your institution’s “why”?
Your institution’s mission governs all interactions with your borrowers. That means going beyond memorizing scripts. It means caring. Doing whatever you can to learn about that borrower and their unique challenges.
Plus, educating them on the potential effects of unexpected events and how your products may help.
You know all this. Does your training reflect it?
Uncovering these “what ifs” for your borrowers paints a clearer picture of their risks. It’s about converting from a “sales call” into a conversation on helping out the borrower.
Peace of Mind is Financial Empowerment
Your loan protection products help provide peace of mind. That, on its own, is a form of financial empowerment. Borrowers can live without the worry of a vehicle accident, breakdown, or other challenge putting them in a downward spiral.
And then, for those who need it? Your coverage does what it says and keeps people on their feet, letting them continue to pursue their financial goals. Because there’s enough things to worry about in our world, your mission-focus can help eliminate just a few of them.
Physical & Mental Health
Any financial plan, especially for those who are already financially vulnerable, can easily be upset & nullified by an unexpected event. Hence the stress! Because financial worry manifests as anxiety, it creates or amplifies real physical and mental health problems.
Given that 90% of Americans get stressed about money in some fashion, your ability to relieve any of these worries is literally making their lives and relationships better. Plus, it can enhance the emotional connection to your institution, which builds loyalty.
Let’s say that again: Your caring offer of protection products can make people healthier, happier, and more loyal to your institution.
Now that’s mission-focused.
Removing Barriers to Financial Goals
Buying a car. Saving for a home. Sending the kids to college. Planning for retirement. Or perhaps just saving up enough for a family getaway. Whatever people are saving to achieve, it’s your mission to help give them the best chance to do so.
We know that saving today is a challenging path for many Americans. On top of societal and economic issues, sudden impacts such as death in the family, disability, unemployment, or even a vehicle accident can delay or end their financial dreams.
Of course, as Dory explained to Marlin in Finding Nemo:
“Well you can’t never let anything happen to him. Then nothing would ever happen to him. Not much fun for little Harpo.”Dory, Finding Nemo
Your role is to help remove barriers and offer a safety net. Then they can spread their fins to explore the big blue, meet 150 year-old turtles, and ride the EAC! Sorry, where were we? I forget things almost immediately. It runs in my family. At least…I think it does…hmm.
So these amazing protection products of yours can help borrowers retain their savings, lift their standard of living, and, maybe even provide the starting point for long-term generational wealth (the latter being a factor in addressing systemic racism).
All of what we’ve covered thus far are effects on a single person or family. Imagine taking this effort and expanding it to 100, 500, or 1,000 families. Think of the good you can bring by helping insulate ensure communities from negative financial impacts!
That’s living the mission and embracing the American dream.
Your loan protection products exist to bring in revenues. But they change lives by driving financial empowerment. And helping secure borrowers’ dreams.
Today, we looked to Protection Products. We offer a range of them that might be a fit for your institution. As always, we understand they may not be a fit. It’s all about ensuring you have the best information to make the right decision.
Until next time, keep it honest (and empowered)!
Blogger. Speaker. Part-time Jedi.
Focused on helping your bank or credit union grow in the face of emerging challenges.