Unlocking the power of Lines of Credit - benefits and challenges

Revolving lines of credit (LOCs) provide borrowers with ongoing access to funds through multiple channels like open/closed loop card solutions or more traditional ACH draw disbursement requests. LOCs not only provide borrowers with financial flexibility but also offer significant advantages for lenders. By incorporating LOCs into their portfolio, lenders can unlock multiple revenue opportunities, strengthen customer relationships, and mitigate risk. Below are key benefits lenders gain from offering lines of credit:

• Increased Revenue Potential: Lines of credit offer lenders diverse revenue streams. Variable interest rates can provide higher returns compared to fixed-rate installment loans. Plus incremental fee options, such as draw fees and annual fees, contribute to overall income.

• Customer acquisition, retention, and cross-selling: Lines of credit can be an effective way to attract new customers and build long-lasting relationships. These products offer an accessible entry point for borrowers, creating opportunities for lenders to offer additional products and services, fostering long-term customer loyalty and reducing the need to rely on constantly acquiring new borrowers.

• Diversified Loan Portfolio: Offering lines of credit allows lenders to diversify their lending portfolio. The variety of line of credit products helps manage overall risk and provides a stable foundation for revenue growth, including the potential for expansion into credit card offerings.

Despite these benefits, many lenders hesitate to introduce LOCs due to the operational complexities associated with their management. Unlike fixed-term loans, LOCs require continuous borrower engagement, including draw requests, repayment recalculations and credit limit adjustments. Legacy loan servicing systems, which are often designed for traditional lending products, struggle to handle these demands efficiently. Therefore establishing a new line of credit program requires the right infrastructure to avoid inefficiencies, increased operational costs, and potential regulatory risks.

But if launching new products come with its own dedicated infrastructure each time, maintenance and operations costs can skyrocket. Disparate servicing systems in particular can cut into profits as you grow, not to mention increasing the operational burden of borrower front-end experiences and agent back-office support. In our decades of experience, we’ve learned that It's much more efficient to have one back-office system that can handle multiple types of lending products in an efficient and scalable manner. It streamlines lender costs, reduces maintenance burdens, and provides a consistent experience for agents and borrowers alike.

Finding a flexible, scalable system can be challenging. Many existing systems are designed for a specific purpose, limiting their ability to handle different lines of credit products. So, when choosing a system, lenders should consider not just their current needs, but also their future growth plans. A system that can adapt and scale is essential for success in today's lending environment.

Peach's system is designed to handle a variety of loan products, including lines of credit, credit cards, and installment loans. This flexibility means lenders can manage all their lending products in one place. We considered the unique requirements of each product type from the start, building in the necessary features to support both current market demands and future growth opportunities, enabling lenders to succeed. For more details on how we support different line of credit solutions, read more here.

Ready to talk about how Peach can support your LOC launch or migration? Contact us today