Before, credit unions were essentially playing a guessing game when it came to determining just how much of a risk they were taking by extending loans to their customers. While they were able to gather information regarding the spending and saving habits of potential lenders, seemingly good loan candidates quickly proved how adept they were at turning loans into bad debt. With new software for credit unions, unions can use analytics to identify potential lending risks, or gain deeper insight during the initial vetting process.
Loan Insurance
Some of the most important risks that credit unions keep an eye out for include the likelihood that the borrower will fully pay back the loan and the enforceability and validity of the guaranty. Once the credit union has evaluated these risks, they make a final decision about whether or not they will grant the applicant the loan and write up the specific terms that will govern the loan.
In certain countries such as China, there’s little risk involved with granting a loan to an entity since the credit union can easily get a full picture of their financial condition, but the same can’t be said when it comes to offering unsecured loans to individuals. The main reason for this is that China has yet to establish a nationwide credit system, which means that they have no way of accurately determining a loan applicant’s financial credibility.
In order to assist credit unions in making more informed decisions about who they grant loans to, integrated credit assessment systems can be used to investigate the potential borrower’s background and provide the credit union with a record of their past financial activities so that the bank has a point of reference they can use.
Financial Protection
As another way to mitigate lending risk, credit unions might also include certain restrictions with their loans. For instance, while the credit union may accept applications for a mortgage with a guarantor, the credit union may require that the guarantor be a corporate organization that has a high credit rating and that they make a deposit at the credit union.
In the case of an individual guarantor, the credit union may choose not to accept a mutual guaranty between spouses. An additional example of a credit union cutting their losses when it comes to issuing a loan is requiring the borrower to purchase insurance. This is common when it comes to home loans and the borrower has to have both mortgaged property insurance and life insurance.
Analytical software can keep credit unions from taking on bad debt that they later have to unload. Just as borrowers should use caution when selecting a credit union to borrow from, credit unions should also use caution when it comes to the individuals and entities they approve for loans.