Alternatives Federal Credit Union ('Alternatives') will offer a new Back on Track loan to at least 300 borrowers during a nine month period. Through this program, borrowers who can provide documentation for an unforeseen need for credit (e.g. mechanic's invoice for car repair) may obtain an unsecured loan from Alternatives. Alternatives will leverage its strength in underwriting, originating, and servicing loans to pilot this new approach that will inform future discussions of product development.
The Back on Track Loan is designed to be easily communicated and understood. The product features a maximum loan term of 36 months, a maximum loan amount of ,000, as well as a simple application process. The loan also carries an eight percent APR, an interest rate which is fixed across all borrower profiles and credit scores to ease marketing and outreach. Borrowers will submit documentation such as an invoice, receipt, or estimate to a member of the Alternatives lending team at the time of application, and loan funds will be paid directly to a vendor or to the borrower to reimburse expenses already incurred.
During this pilot, Alternatives will test different forms of documentation submission, including mobile remote capture, to determine how best to streamline the application process for members and staff. Additionally, Alternatives will experiment with different approaches to earmarking, such as direct disbursement to vendors and variation of the categories considered productive.
Using administrative data, such as borrower characteristic, loan characteristic, and loan performance, Alternatives and IPA will determine the appropriate pricing of the product, explore whether the product is being used as intended, and assess the financial viability of the product for Alternatives and other financial institutions. With this preliminary product offering, Alternatives and IPA plan to address the following questions:
-Is there sufficient member demand to warrant continued product offering?
-How do loan payment/delinquency rates differ between those who did and did not use the product?
-To what extent do borrowers who utilize credit for 'productive' uses exhibit different characteristics than the borrowing population as a whole?
-With regard to loan amount, loan term, and loan interest rate, what is the optimal structure of such a loan product to motivate consumer demand and payment behavior?
Qualitative data, such as member and staff feedback, will also be used to supplement the development of, and changes to, the product design.
In August 2014, Alternatives will launch the 'Back on Track' loan product. The offering will be communicated to members in an August e-newsletter, on the credit union's website, and with printed materials and signage in the Alternatives branch.
The product will be promoted through the physical, electronic, and community outreach infrastructure of Alternatives, a credit union with over 9,000 members. IPA is supporting the development of written content for use in promotional material, and the loan offering will be communicated through the Alternatives website and social media as well as through the resources of local non-profits with which Alternatives partners to extend service. Alternatives will market the product to its core membership, which is comprised of lower income members who utilize the credit union's banking services and educational programs to progress along a path toward becoming savers and effective users of credit and owners of assets like homes and small businesses. Selected businesses, such as auto repair shops, will be contacted to serve as referral sources for the loan from Alternatives.
By October 2014, Alternatives will increase marketing of the product and begin to create quarterly reports with Innovations for Poverty Action. These reports will include commentary on the project's major achievements, successes, and challenges, which will be used to identify changes to the product design. Additionally, reports will include up-to-date data on offers and take-up of the product, loan characteristics (i.e. purpose, amount), and monthly payment behavior, such as delinquency status and rate of on-time payments.
By the fall of 2014, Alternatives and Innovations for Poverty Action will reassess the structure of the loan based upon early performance indicators, client feedback, and preliminary data. By April 2015, Alternatives will have offered the loan to over 300 prospective borrowers.