Meeting Community Needs: Why Personal Loans are Essential for Community Banks
The community bank plays an important role within its neighborhood. From helping the
single mother gain financial freedom to fulfilling the dreams of a small business owner, the
community bank transcends from a mere financial institution to a champion of empowerment
and investor in local growth. Because of their unique position in the community, community
banks need versatile lending options, such as personal loan services, to best meet the needs of a
diverse population. By incorporating these resourceful financial tools as part of their services,
community banks can address the demands of their local community and cultivate strong
customer relationships.
Understanding Growing Demand for Personal Loans
Personal loans are one of the fastest-growing financial solutions currently in the industry.
According to U.S. News, nearly 23 million Americans today have an unsecured personal loan,
while another 4.5 million are presently paying on more than one personal loan. High inflation
rates and the after-effects of the COVID-19 pandemic have contributed to a steady increase in
personal loan use. TransUnion data shows that outstanding personal loan debt has increased 54%
since the beginning of the pandemic; meanwhile, credit card debt only grew by 16% in the same
period (Federal Reserve Bank of New York). The rise in popularity of personal loans can be
largely attributed to their flexibility. With a personal loan, users can spend their funds on an
array of expenses ranging from medical needs to vacations. Surveys from Market Watch show
that over 40% of personal loan consumers cite debt consolidation or home
improvements/renovations as their primary reason for taking out a loan. Other reasons users take
out a personal loan include car financing or repairs, bills, medical, moving or relocating, grand
education expenses. Their versatility allows borrowers to customize funds to best fit their needs
and goals, making them a source of potential growth for community banks.
Identifying Gaps in Current Offerings
Despite the increase in popularity, many community banks do not offer personal loans
due to their perceived predatory nature. The flexibility of personal loans and the potential to trap
consumers in a borrowing cycle prevent community banks from providing these valuable
services to consumers. Although these are valid concerns for banks, personal loans have a proven
track record of risk assessment. Like other loan types, personal loans are also subject to
regulatory oversight to prevent risky lending practices. Modern lending technology offers risk
assessment features, such as credit scoring and income verification, to ensure certain
qualifications are met before loan servicing. Collateral and guarantors provide an additional layer
of security against loss for lenders. Finally, personal knowledge of their customer’s overall
financial picture also helps community banks to reduce the risk of loss. With sufficient research
and modern lending software, banks can easily plan for the risk as part of their overall loan
portfolio.
In order to best meet the financial needs of their community, community banks should
analyze data, gather consumer feedback, and conduct market research to efficiently pinpoint the
gaps in their current loan products. Running data analyses of loan portfolios and performance
can help detect issues and deficits with the existing loan offerings. Through surveys and
interviews, community banks can also utilize customer feedback to discover problem areas and
make informed decisions regarding their loan products. Staying up to date on the current market
and regularly conducting market research can be useful in improving financial services. Market
research can reveal new ground-breaking products that are changing the loan industry. Similarly,
constantly evolving economic conditions can influence the demand for certain loan types. Being
knowledgeable about market conditions and innovations can help banks to make calculated
decisions about their services. By taking proactive steps in identifying the gaps in their loan
products, community banks can strategically enhance their ability to provide a more customized
and relevant service to consumers.
Building Stronger Customer Relationships
Integrating personal loans into a community bank’s loan products offers a mutually
beneficial solution for both the bank and the consumer. When a borrower applies for a loan
through a community bank, the bank gathers insight into the client’s specific financial needs and
goals. They are able to leverage this information to seek tailored financial solutions that satisfy
the customer’s requirements. Customers benefit from a financial product that suits their purpose,
and both the customer and bank profit from the establishment of a strong customer relationship,
one of the most valuable assets a community bank has in a competitive market.
Strong consumer relationships help to differentiate community banks in a competitive
market and promote customer satisfaction and loyalty. Through personal relationships,
community banks better understand their customers’ needs and preferences, enabling banks to
offer personalized loan products based on the customer’s requirements. A customized approach
makes the borrower feel valued and understood, increasing their satisfaction, loyalty, and trust.
Satisfied customers are more inclined to continue to use the bank’s services for their financial
needs and promote the bank to others. This differentiation in customer experience equips
community banks with a competitive edge and allows them to better promote financial inclusion
in underserved neighborhoods.
Meeting Community Reinvestment Act (CRA) Criteria
Since 2014, the FDIC has made strategic efforts to promote economic inclusion with a
focus on financial well-being in low- and moderate-income (LMI) communities. These
underserved neighborhoods were the focus of the Community Reinvestment Act (CRA) of 1977,
which encourages financial institutions to provide banking, lending, and investment services in
all communities in which they do business. The CRA requires an evaluation of a bank’s lending
services and its ability to provide adequate services to LMI communities, routine performance
evaluations, and public disclosures of evaluation results. The CRA also expects banks to invest
in community development projects to further expand growth opportunities for LMI individuals
and families, including affordable housing, community projects, and other economic
development programs. Recent rulings attempting to modernize the CRA encourage banks to
continue improving financial wellness in LMI communities through expanding credit,
investment, and banking services, adapting to industry changes, and providing transparency in
regulation application. CRA regulations have been instrumental in extending financial inclusion
to marginalized communities.
How Personal Loans Contribute to CRA Compliance
From meeting the credit needs of a diverse community to investing in local economic
development, personal loans play a critical role in helping community banks satisfy CRA
regulations. Personal loans directly attend to the credit needs of the entire community, especially
those that may not have adequate access to proper banking services. By offering personal loans,
community banks are extending credit and lending access to underserved populations, enhancing
the financial lives of LMI neighborhoods and stimulating economic growth. Through this
economic growth and stability is where the CRA sees its success; LMI communities equipped
with personal loans lead to increased homeownership, pursuit of further education, more small
businesses and startups, and credit building. When banks effectively meet the credit needs of
their community through personal loans and adequate banking services, they invest in their
neighbors and help to build strong communities.
Strategies for Effective Personal Loan Offerings
In order to effectively offer personal loans, community banks should employ a variety of
strategies that optimize loan products while also enhancing customer satisfaction. By focusing on
these initiatives, community banks can meet the diverse needs of their community while also
staying relevant in a competitive market.
- Develop Competitive Loan Products
Having a competitive loan product gives community banks an upper hand in the
rivaling market. When designing a new loan product, banks should utilize research and
surveys to ensure the product is attractive to consumers. Leveraging borrower
information is an easy way to identify likely prospects and areas for potential products.
By doing so, consumers will have access to a unique loan product that fits their specific
needs, leading to improved customer satisfaction. - Utilize Technology for Loan Processing and Servicing
Large banks with access to new technology often have the advantage in loan
products. However, modern lending technology is expanding to better help the needs of
community banks, giving them the same resources as large financial institutions.
Technology like Vergent LMS streamlines the loan application and approval processes,
making the servicing and collection of loans more efficient. Our innovative software
provides every lending solution under one cohesive and responsive platform, simplifying
the loan process for lenders and borrowers alike.
Community banks are an essential feature of any neighborhood, paving the way for
economic growth and stability in diverse communities. Personal loans offer these communities
the flexibility to satisfy an array of financial needs, including home repairs, educational costs,
and debt consolidation. Including personal loans in lending options allows banks to directly
invest in their local community, cultivating strong customer relationships. Under the CRA,
personal loans can be instrumental in increasing economic inclusion and financial wellness in
low- and moderate-income communities. As the demand for personal loans continues to rise in
the U.S., community banks should assess their current loan offerings and consider integrating
personal loans into their services to better support their communities.
