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During my second or third year in college I took a class in Chinese Politics. The professor was a fascinating guy who quoted what he said was an ancient Chinese curse, “May you live in interesting times”. It’s one of the few things I remember from that class. Regardless of its source, I supposed that most credit union and community bank executives are certain the curse has befallen them. Investors and lenders like uninteresting predictability, and over the last several months almost nothing in the economy has been predictable.  What can a lender do in these times to ensure acceptable yields?

By now, just about everyone in the money business has read something about the “inverted yield curve”, a recently observed phenomenon. The simple definition is that short-term interest rates are higher than longer-term ones. It’s what happens when investors are bidding for longer-term bonds, thus driving down their yields, because they are pessimistic about the short-term prospects for the economy. Experts generally believe it’s one sign that the economy may be headed for a recession. No one is certain that a recession is coming soon, but it certainly is true that this situation is rare or “interesting”.  But, let’s not let it become a “curse” to live in these interesting times. Maybe we can even benefit from them.

We here at Integrated Lending Technologies believe it’s time for credit unions and community banks to give some serious consideration to  their auto lending programs and other similar shorter term lending programs that can produce better yields than playing it safe with lower yield long term bonds or similar investments.  Even though auto loan and other short-term rates have generally fallen a bit lately, they are higher in relation to rates on longer term loans and to long term government securities than they were a year ago. According to Brian Turner, president and chief economist at Meridian Economics, the value of investing in vehicle loan originations not only brings higher yields in today’s market, it also provides a wider pricing spread to absorb potential risk exposure, (Credit Union Journal, August 16, 2019).

Of course, auto loans aren’t the only short-term lending option. Unsecured personal loans can be a profitable alternative. Rates on these loans are usually higher than auto loans but lower than a credit card, giving borrowers a preferable solution. What’s more, these loans can even be sourced and managed with programs like indirect auto lending. Some refer to such loans as “lifestyle loans” because some borrowers use the proceeds for elective surgery or similar uninsured procedures. But there are many opportunities for lenders, working in cooperation with other service providers or vendors, for higher yield short term loans.

If lenders are interested in wider pricing spreads and higher yields, this is the time to take action. It’s time to be more creative with indirect lending. It’s a good time to consider buying deeper, using default insurance protection or other risk mitigation programs. It’s the right time to take a look at the largely untapped market for higher yielding lifestyle loans. Rather than trying to avoid the “curse”, banks and credit unions need to take advantage of living in these “interesting times”.