Low home inventory coupled with comparably high-interest rates and high levels of home equity has resulted in a large population of homeowners that have decided to ‘stay put’ and a corresponding boom in home improvement as they work to make their current home more closely align with their needs—whether through modernization, expansion, or repair.
While the pandemic-induced home spending spree has dissipated in favor of a more stable market, research indicates that the home improvement boom is far from over. Furthermore, those who do purchase a home in this market are more likely to buy a fixer-upper that needs significant work, leading to a separate but equally compelling wave of home projects.
Meanwhile, rising interest rates have sensitized consumers to predatory loans, which unfortunately still dominate certain home improvement categories like HVAC repairs, exterior upgrades, and more.
Together, these factors create a compelling environment for credit unions, who are widely recognized for their commitment to fair rates, customer service, and contrast to the big bank experience. By replacing merchant-offered loans with a more mutually beneficial alternative, credit unions can diversify beyond auto loans, break into this booming market, and uncover a source of new depositors in the form of merchants and consumers alike.
If you’re a credit union weighing the benefits of adding home improvement loans to your lending portfolio, here are the top four reasons now is the time.
- Projects come in all shapes and sizes
From a full-fledged remodel, which averages $100,000 to $200,000, to a backyard refresh, which ranges widely from $10,000 to $100,000, to a new HVAC, which falls in the range of $5,000 to $12,000, home improvement projects span a wide range of total costs. This means lenders in the home improvement category can tailor their focus to their desired loan amount and term to meet the unique goals of their portfolio. Few asset classes offer the level of segmentation that home improvement provides across subcategories.
- Predictable payback schedule
Generally, necessity has an inverse relationship with the rate of default. It makes sense, then, that highly necessary home improvement-related loans have among the highest payback rates. In addition, these home improvement borrowers are highly likely to adhere to the loan terms instead of refinancing prematurely, providing the greatest possible return to the lender.
- Existing financing solutions leave much to be desired
While categories like car loans are highly saturated and poorly differentiated, there is a greater opportunity for both disruption and differentiation in home lending products—particularly for credit unions that enter the space. Many home repair financing options are tied to credit cards, which replace zero percent APR with an exorbitant rate after 12 months. Other options are offered by established financing incumbents who have made predatory rates the de facto standard in a specific home improvement category. Other options may provide a fair and competitive rate but be offered by one of the large banks, which consumers currently view with a degree of caution.
- Lending can drive new depositors over time
Like most banks, credit unions currently focus on driving deposits, a goal that is powerfully advanced by offering merchants fair financing programs for their customers. Financing increases the average job size and helps merchants grow their businesses, opening an opportunity for credit unions to engage those merchants as depositors in the future. Similarly, individual borrowers are likely to become active depositors in the credit union down the line, particularly after they get a taste of the customer-centered experience for which credit unions are known.
How you can tap into home improvement with LoanStar
The sustained boom in home improvements coupled with poor or predatory lending alternatives provide credit unions a window to diversify their loan portfolio and engage new depositors in the future. With a flexible embedded finance solution that is 100% dedicated to the credit union community, LoanStar enables credit unions to design an embedded finance model that suits their needs, identify appropriate lending opportunities that meet the parameters of their portfolio, and engage customers in an experience that reinforces their commitment to community, service, and mutual benefit.
Whether you’re looking to service merchants and homeowners in your local community or want to tap into aggregated opportunities nation-wide, LoanStar’s adaptive platform can help you tap into the home improvement market in a way that makes sense for your credit union.
Are you ready to participate in the home improvement boom? Contact LoanStar to get started today.
