What’s the point of your lending program? Yes, it’s a real question. Is it to make enough money from interest to subsidize other institution programs? Maybe it’s to empower people to make purchases they couldn’t do on their own.
In reality, you know it’s a combination. While profits might not be a publicized goal, you do need the interest income. Your whole model is based on producing certain margins. And plus, it helps you be able to lend to people other institutions may deny.
We’re all about that community-mindedness. Providing people a line of credit, whether for a home, a car, or simply secured by their promise to repay is a brilliant feature of modern society. You can help people out of challenging times or situations, while changing lives.
Yeah, go ahead. Take a moment to be proud of your role in the community financial institution mission.
So is just providing a loan sufficiently empowering borrowers? Not quite. Because while their opportunities grow after your approval, so too does the burden of repayment. At the end of the day, you need them to be able to pay back the loan.
Thus, if things happen, they are on the hook. Thank goodness you provide products which can minimize or eliminate financial obligations in those situations.
In previous articles, we discussed the beneficial role of your entire loan protection product suite. We also looked at how checking contributes to financial empowerment. Here, we focus specifically on Payment Protection.
Why? Because while all the other ancillary products serve important roles, this category can provide needed assistance during some of the worst times people ever experience. So join us to gain a deeper understanding, plus, discover questions which spark the right pains.
Your goal should be to provide appropriate protection to anyone who would suffer without it.
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Why offer Payment Protection products?
Seems like a silly question. To protect your borrowers, right? By design, they help:
- Protect your borrowers from passing debts onto their families
- Protect your financial institution from delinquencies & repossessions
- Generate a source of non-interest income
Everyone wins! Sure, your borrowers don’t care about protecting your institution or how much income you make, but they definitely care about not passing debts onto family members. In fact, we bet some number of your borrowers don’t even know that could happen.
So with all this going for the Payment Protection suite, why not discuss it for every vehicle financed? Which of the benefits would excite your staff so they can confidently offer Payment Protection to every borrower?
Ultimately, it’s that simple. Of course, you’re most familiar with the training strategies of product offering.
Everything to Everyone
Sidenote: Yes, this was written by a teen of the 90s. How could you tell?
You’ve heard the line “100% of people, 100% of products, 100% of the time” from us and probably in staff training. It’s a good idea. If you don’t bring something up, how will the borrower know it exists?
For other products, there is a challenge with ensuring the need is real for the protections you share. A VSC for someone buying a new Hyundai and planning on trading it in after 4 years probably isn’t worthwhile. Offer, but clarify before encouraging unnecessary spending.
However, some protection products are applicable to everyone. Like Payment Protection. So let’s make sure it’s always offered.
Why does Payment Protection exist?
Payment Protection products help address the risk of financial loss following an unexpected life event. That applies whether it is the “insurance” or “debt cancellation” version. Potential risk falls to both the borrower and their family in the following situations:
Death
The last thing a borrower’s family should have to deal with in such a situation is paying off a loan. However, the risk is there, for them and your institution. Benefits to pay off the outstanding balance go to your institution, relieving them of the debt burden.
Without death protection (ie. Life insurance), the liability falls to the borrower’s family, and that needs to be made clear during any conversations and on online educational materials. Joint policies and waivers exist for families with at least two main sources of income.
Disability
If the borrower becomes disabled and is unable to work, their source of income disappears. Without it, how do they remain current with their car loan payments? The risk spreads to all parties, from the now-disabled borrower to their family, and finally to your institution.
Thankfully, they’re alive, but the financial challenges can be similar to the above section, without the “protection” from life insurance.
Payment Protection disability coverage can provide a “lifeline” by waiving loan payments for a stated period of time. The hope is that it’s long enough to allow them to recover and return to work.
Unintentional Unemployment
Like disability coverage, the risks are the same.
Discover the 5 Easy Tips for Payment Protection Cheat Sheet. Do borrowers need it? How does an “agnostic” platform help? Debt Cancellation or Credit Insurance? This and more, inside!
Get the Cheat Sheet
Identifying Borrower Risk
How do you know which borrowers have a need for financial protection due to death, disability, or involuntary unemployment? In reality, if affected by these events, everyone would receive benefit. Yet you know not all will add it onto their loan. So how to better focus?
It begins with knowing your borrower’s financial position and asking some targeted questions.
Death
Only 59% of Americans have any type of life insurance. That’s a concern, and even affects the insured. According to life insurance industry group LIMRA, nearly half of U.S. households are underinsured, with an average coverage gap of $200,000.
In the case of death of the borrower, the majority of American households would inherit the outstanding loan debt. Some would even be forced to surrender the vehicle to your institution. Payment Protection can eliminate that series of financial challenges.
Ask borrowers if they have life insurance. For those who do, discover whether it is sufficient to cover the cost of paying off the loan, in addition to other expenses. Explain how Payment Protection can leave more of those funds for things they need in such a time.
For those who don’t have life insurance, ask if they would want to pass on the loan obligation to their family. Sure, it’s a loaded question, but your goal is to help them understand the risks and potential pains of not having the coverage.
Disability
If you thought life insurance stats were disheartening, they are even worse for disability. According to the Council on Disability Awareness, only 1 in 3 working Americans have adequate disability insurance coverage.
A common misconception is that Worker’s Compensation and Social Security Disability will satisfy this safety net. However, most disabilities are non-occupational in origin and Social Security benefits, if approved, may be limited and not start for at least 6 months to a year.
With 78% of workers living paycheck to paycheck, the math to stay current on loan payments simply doesn’t work. How much did Payment Protection add to the loan per month again?
Unintentional Unemployment
What are the chances of a borrower getting laid off or losing their job? While none of us have a crystal ball to predict the future, we’re all vulnerable to an extent, some more than others. And 2020 showed us a new level of unpredictability.
The COVID-19 pandemic and resultant economic downturn and job loss was staggering, and will likely continue until society can safely return to “normal”. Or at least until we see additional government response. Regardless, your borrowers will be at risk.
Unemployment benefits vary dramatically in amounts and duration by state. Extended unemployment, as 2020 presented, combined with a majority of Americans living so close to the edge financially, may make on-time loan payments impossible for many.
Talk to your borrower about their job security and confidence in employment. Ask what they would do if they lost their job. It’s not judgement; it’s active preparation.
The Impacts to Borrowers
What’s your mission? Sure, trainers will discuss sales penetration and revenue generation. Both are important for institution growth. Your team might even receive financial incentives as production grows. Rewarding productivity is great!
Once again, what’s your mission? It’s about helping members achieve their dreams while protecting them from financial pitfalls which get in the way. Because you’re focused on improving lives and building thriving communities.
It just so happens that Payment Protection can serve an important role in this effort. We’re big on Financial Empowerment and believe it refers to more than education. Use your power.
Empower Your Financial Empowerment Efforts
This is just one article in a full category of Financial Empowerment content. While we believe education is only a piece, it is still important. Connecting your services and products to that shared goal is where you want to be.
Consider having some education that, upon completion, waives a fee you may still have. Yes, we suggest the program be delivered when a person first receives an NSF or other fee. That way, you’re educating at the moment of action. And they get an immediate financial reward. That is, of course, if you haven’t already gotten rid of your fees.
Not everyone can afford to avoid such situations, but perhaps some of them, which saves valuable funds. And it was due to your efforts. Nice work on your mission!
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Image credits: Family silhouette by Jill Wellington. Family protection card & puzzle health by Gerd Altmann. Life ring by DaveMeier. All from Pixabay. Black piggy bank by cottonbro studio from Pexels.
Blogger. Speaker. Futurist. Part-time Jedi.
Dedicated to helping your credit union, large or small, deliver mission-focused financial empowerment to your members. And make a positive impact on your community while you’re at it.