Providing Additional Liquidity to Some Delinquent Borrowers Can Actually be a Win-Win
New TransUnion study finds that certain challenged consumers perform well when securing another loan
Consumers who fall behind on credit payments may find an unexpected lifeline—another loan from their lender. A new TransUnion (NYSE: TRU) study found that, in some instances, both lenders and consumers can benefit when additional loans are extended to customers during difficult times. The findings were released today during the 2019 TransUnion Financial Services Summit, attended by more than 300 executives from across the globe.
“Early stage delinquency usually triggers caution among lenders, given the propensity of consumer performance to deteriorate from that initial delinquency. Our study certainly corroborates the need for caution, as more than half of consumers with credit products that are 30 days past due will remain delinquent—or charge off—over the next six months,” said Matt Komos, co-author of the study and vice president of research and consulting in TransUnion’s financial services business unit. “Yet there is a material subset of consumers who could successfully get back on track by receiving a new loan when in the early stages of delinquency. While this may be viewed as a contrarian approach to lending, our study clearly points to the existence of—and critically, the ability to identify—borrowers who are likely to successfully navigate a short-term crisis if they were to receive more liquidity.”
The study yielded methods to identify delinquent borrowers who, when provided with a personal loan, would be most likely to “cure” on at least some of their existing delinquent debt and also perform well on the new loan. These borrowers exhibited specific characteristics, including:
- Older trades. These borrowers generally had at least one credit product that was 10 years old or older.
- More active trades. Consumers who had on average eight open accounts or more performed significantly better than those with fewer open accounts.
- Greater proportion of revolving trades. Borrowers who had an overall credit makeup that included 12% to 15% of revolving accounts performed much better than those with lower revolving percentages.
In the study, 31% of delinquent borrowers experienced improvement on one or more of their delinquent debts when securing a new personal loan. In addition, 24% of borrowers also performed well on the new loan. Hence, the set of consumers identified in the study as potentially good risks to receive a new loan is a select yet significant group.
“Borrowers enter delinquency for a variety of reasons. A common reason is simply taking on too much debt, and overextending oneself beyond one’s capacity to repay. But other reasons include temporary liquidity constraints caused by sudden, acute events such as accidents, unexpected medical bills, or unanticipated auto/home repair bills,” said Kristen Bataillon, co-author of the study and senior manager of research and consulting in TransUnion’s financial services business unit. “Recognizing these differences is a critical step in engaging these customers effectively.”
The insights from this study are particularly timely as lenders prepare for the next economic downturn, which is anticipated by most economists to hit the U.S. within the next few years.
The study noted that a combination of trended and traditional credit attributes can help identify borrowers who are most likely to benefit from a new loan. “The unique combination of these attributes is key to determining which consumers struggling with early-stage delinquency will likely recover on past due accounts and perform well on the new loan,” added Bataillon.
The study observed 30,000 borrowers who originated unsecured personal loans in 2017. The control group consisted of 15,000 borrowers who were current the month prior to origination. The study group included 15,000 borrowers who were delinquent the month prior to origination. The study then assessed account performance over the next year on both the existing delinquent loans and the newly originated loans.
“This approach is built on the premise that the onset of delinquency does not necessarily dictate an unfortunate end to the lender-customer relationship. Our study shows that in certain circumstances, lenders can help their customers through tough times, which should contribute to stronger, mutually profitable relationships for the long term,” concluded Bataillon.
For more information about the study, please visit http://www.transunion.com/delinquency. Consumers interested in receiving specific, actionable steps they can take to achieve the credit score they want over a period of up to 24 months should visit the TransUnion CreditCompass™ website. CreditCompass creates each individualized plan by assessing a consumer’s personal credit data, as well as data from millions of real credit experiences of Americans who successfully improved their credit health in similar situations.
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