Proactive Measures to Reduce Personal Loan Delinquencies: A Guide for Lenders

Delinquencies on personal loan payments, defined as payments 60+ days past due, have long been a point of concern for lenders. While the rate of delinquencies has fallen from 4.14% in Q2 2022 to 3.90% as of Q4 2023, there has been a steady increase since Q1 2023 when the rate was 3.62%. This upward trend could be indicative of future challenges, although current rates are still well below the peak seen in 2009 after the Great Recession, when delinquency rates reached 4.77%.

Despite the YoY improvement, personal loan delinquencies remain significantly higher than those of other lending products, such as mortgages (1.03%), auto loans (1.61%), and credit cards (2.59%-measured at 90 or more days). This is particularly important for lenders, as they have a vested interest in maintaining low delinquency rates. High delinquencies can lead to significant financial losses and impact a lender’s overall financial health. Therefore, proactive measures to support personal loan borrowers are essential.

This blog explores the proactive measures that lenders can take to reduce delinquencies on personal loans.

Consumer Desire for Personal Loans

Understanding why consumers take out personal loans is crucial for lenders aiming to support their borrowers effectively. According to LendingTree, most borrowers (54.3%) take out a personal loan to consolidate debt or refinance credit cards. The next closest reason is for everyday bills (7.8%).

Delinquency Prevention Measures

Early Intervention and Support

Implementing early intervention strategies, such as proactive outreach to borrowers with past-due payments, can help prevent delinquencies from escalating into defaults. By identifying struggling borrowers early and offering support and guidance, lenders can improve the chances of successful repayment.

This method of outreach is particularly effective via text campaigns.

The Value of Text Reminders

Our research shows that the average American adult pays 67 bills a year across various bill types and billers. Despite this, only 57% of these consumers have received a text message related to paying a bill or a reminder to make a payment. Among consumers who made a late payment, 85% are more likely to pay a bill on time if they had received a text reminder. This gap highlights a missed opportunity for billers to leverage the benefits of text reminders. Text messaging aligns with the four pillars of delivering value to customers: it is convenient, fast, personalized, secure, and preferred by many consumers.

Low-Cost and Effective

Businesses are increasingly using text messaging to remind consumers to pay their bills. This method is incredibly low-cost compared to other channels like postal mail. Moreover, it is highly effective in capturing a consumer’s attention since 97% of consumers own a cell phone and are active users.

Consumer Preference

Text reminders are becoming the preferred communication channel for consumers, especially for late payment or past-due reminders. About 80% of consumers prefer receiving these reminders via text. Younger generations in particular favor this method, with approximately 92% of Gen Zers and Millennials preferring text reminders compared to about 68% of Baby Boomers and Seniors.

Most importantly, text reminders are appreciated by consumers. Among those who made a late payment, 95% would have valued a text reminder before the late payment occurred.

Payment Reminder Campaigns for Lenders

          1. Payment Due Reminder
            • Message: “Hi [Customer Name], just a friendly reminder that your loan payment of $[Amount] is due on [Due Date]. Please make sure to pay on time to avoid late fees. Thank you! Reply STOP to opt out.”
          2. Upcoming Due Date Alert
            • Message: “Hi [Customer Name], your loan payment is due in 3 days. Please ensure you make your payment of $[Amount] by [Due Date]. If you need assistance, contact us at [Contact Info]. Reply STOP to opt out.”
          3. Past Due Notification
            • Message: “Hi [Customer Name], your loan payment of $[Amount] was due on [Due Date] and is now past due. Please make your payment as soon as possible to avoid further penalties. Contact us if you need help. Reply STOP to opt out.”
          4. Thank You Message Post-Payment
            • Message: “Hi [Customer Name], thank you for your recent payment of $[Amount]. Your account is now up to date. We appreciate your timely payment! Reply STOP to opt out.”

Enhanced Communication Channels

Improving communication channels between lenders and borrowers can help identify and address potential issues early on. Providing quick, easy, and accessible channels for borrowers to reach out for assistance or information can prevent missed payments and foster better financial management.

One such avenue is two-way texting. Two-way text allows your organization to enable immediate conversational messaging between consumer and agent. This method of servicing is proven to decrease case resolution time by upwards of 40% and increase overall case resolution volume.

Flexible Repayment Options

Offering flexible repayment options, such as deferment or personalized payment plans, can provide relief to borrowers facing temporary financial hardships. By working with borrowers to find solutions tailored to their individual circumstances, lenders can reduce the likelihood of delinquencies.

Repayment Campaigns for Lenders

            1. Reduce Monthly Payment
              • Message: “Hi [Customer Name], want to reduce your monthly payments? Check out our new repayment plans designed to lower your monthly burden and keep you on track. Reply YES for more details or STOP to opt out.”
            2. Simplified Repayment Options
              • Message: “Hi [Customer Name], we’ve simplified our repayment options to make it easier for you to stay on track. Explore our new plans designed to fit your lifestyle and financial goals. Reply YES to learn more or STOP to opt out.”
            3. Personalized Deferment Plans
              • Message: “Hi [Customer Name], facing a temporary financial hardship? We offer personalized deferment plans to give you the breathing space you need. Reply YES for more info or STOP to opt out.”

By implementing these text campaigns, lenders can support their borrowers effectively, reduce delinquency rates, and improve overall financial health for both the consumers and their own institutions.

It’s clear that proactive measures are beneficial for lenders seeking to mitigate the challenges posed by personal loan delinquencies. Despite the slight decrease in delinquency rates YoY, the continued upward trend QoQ in 2023 underscores the need for sustained efforts. By understanding consumer motivations and implementing early stage intervention strategies, such as text reminders and flexible repayment plans, lenders can significantly reduce delinquencies, foster consumer trust, and promote financial health among borrowers. Enhanced communication channels and personalized support further contribute to this goal, ultimately benefiting both borrowers and lenders alike. By prioritizing these proactive measures, lenders can uphold their commitment to financial stability and strengthen their personal loan mix within their portfolio.

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