Driving ROI through your loan management system

Return on investment (ROI) for loan management software is a formula for measuring a software’s cost against the estimated value it provides. ROI calculations help credit providers directly compare different software or management solutions and determine which choice will be the most profitable.

As in most industries, ROI calculations for lending and credit are estimates. Both the anticipated costs and possible returns are flexible and subject to market conditions. Rather than viewing ROI calculations as a forecast of future earnings, it’s more helpful to see them as models for comparing different management options and preparing for a range of likely future scenarios.

Calculating ROI for loan management software

The ROI for a loan management software is calculated by subtracting the estimated cost from the predicted value it will deliver. To put up-front costs like onboarding times or an activation fee into perspective, it’s best to calculate these figures a year out or more.

The ideal timeline for a calculation depends on contract length. If you’re considering signing a five-year contract, estimating costs and returns for five years may be ideal, though estimates will grow less accurate as you expand timelines into the future.

Factors that affect ROI for lending and credit

Costs are more complex than just a single sticker price, and predicted value is influenced by many components of the platform. Breaking these factors down into categories can help formulate your ROI calculations.

If your data allows, it may be helpful to calculate ROI with different values for each of these factors. Consider a most likely scenario (based on vendor data as well as your own internal benchmarks) as well as best and worst case scenarios.

Costs associated with loan software

Costs comprise both direct payments made to your software platform, as well as other costs that switching providers may impose on you.

Here are the major costs associated with an loan management software:

• Direct pricing. This refers to the money paid directly to the software platform, as well as any vendors they work with (e.g., data partners, communications systems, third-party analytics, etc.). While it may sound straightforward, this is seldom a flat fee. Some platforms bill per user, per account, or by other use metrics, and most charge additional fees for support hours or premium customization. Those direct costs may still total less than what your current system costs, but it’s important to consider all of the different components that might make up your eventual direct pricing.
• Compliance burden and risk. If a system doesn’t provide adequate compliance safeguards, credit providers risk unexpected fines, which routinely run in the millions. (For example, USAA was recently made to pay $64.2M after remediation checks from a previous compliance issue were sent in nondescript envelopes that members mistook for junkmail.) Manual processes and improved training can fill gaps between a platform and compliance regulations, but at the cost of operational efficiency.
• Opportunity costs. During the time that a credit provider switches to a new system (or builds their own), they could have been using those resources elsewhere. If you’re considering building your own in-house loan management software, factor in ROI for software project management: one in six IT projects has a cost overrun of 300%, and a schedule overrun of 70%.
• Onboarding and training. As you first migrate your portfolio to a new platform, you can expect a drop in productivity. Even once you’ve completed the initial migration, consider the training cost for new hires. If the system is easier to learn and use than your previous option, training costs will be lower.

Predicted value of a loan management system

The ultimate value of a loan management software is the sum total of the different benefits it offers, which can then be compared against the costs of purchasing, implementing, and using the system. Every loan management software offers different strengths—and weaknesses—so your calculations for value may include different aspects when comparing multiple systems.

For example, if one system offers better servicing and collections tools, but another offers a better origination workflow, neither will be a perfect solution that’s better across the board. There are legitimate trade-offs to be made, but by calculating their predicted dollar value, you can compare them in like terms.

Here’s a breakdown of the major value drivers you should look for in a loan management software:

• Increased efficiency. If a loan management software can help streamline or remove work from your agents’ day-to-day workload, your operation will be able to support additional growth without increasing headcount, ultimately driving up profit margins. Most loan management software offers some tools for automation, as well as built in processes that can speed up specific tasks. You can calculate efficiency gains by asking vendors for a typical agent-to-account ratio, then comparing it to your own.
• Decreased credit losses. Driving down delinquency and default rates can help your margins stay healthy. While some loss is an inherent risk of issuing credit, some platforms can reliably mitigate that risk with data-driven underwriting and decisioning, as well as improved tools for keeping borrowers engaged and repaying.
• Reduced compliance and security risks. If your current software leaves you vulnerable to compliance or security issues, your ROI calculations should consider the benefits of reducing those risks. The full value, however, may be difficult to quantify since major penalties or security breaches can end a company. One method for calculating risk prevention ROI is to compare it against the cost of implementing similar security measures on your current system.

Driving ROI throughout the account lifecycle

From the minute a borrower fills out an application through to their final payment, a modern loan management system can help reduce risks, lower operating costs, and increase repayment.

Let’s break down where those gains come from.

End-to-end loan origination software

Right from the beginning of an account’s lifecycle, there are plentiful opportunities to fine-tune products and processes for long-term ROI—as well as potential pitfalls that can sabotage your ROI from the start.

If a more thoughtful underwriting and decisioning process can reduce even a marginal number of defaults, the impact on ROI can be significant. The napkin math works out like this: if an individual account has an ROI of 10%, then it takes ten customers repaying perfectly to make up for one default. And if your returns on those accounts are lower, an even greater share of your portfolio practically only exists to make up those losses. With average delinquency rates increasing year-over-year for nonsecured credit, preventing defaults is more important than ever.

Modern loan origination software provides several tools that can influence long-term ROI:

• Alternative data sources. Estimates of the exact number vary, but industry experts agree that credit bureaus have records for over 200,000,000 U.S. adults, leaving perhaps as many as 60 million adults with no credit report. And of those that do have reports, millions are too thin to provide a meaningful gauge of creditworthiness. Supplementing traditional credit scores with alternative data can help provide a more complete picture—both of applicants who are likely to repay as well as those with a greater risk of default.
• Product matchmaking. While creditors should be mindful of borrowers’ ability to repay, they may be able to offer more products without increasing default rates through product matchmaking. By offering a wider range of products (some with lower credit limits), creditors can pair applicants with a product that they’ll be more likely to repay.
• Knockout rules. Even as you improve your underwriting and decisioning data, it’s important to remember that the data isn’t free. But you can save time and money with knockout rules that eliminate ineligible applicants before spending any money on data gathering. For example, you could rule out applicants under a certain age or in lending jurisdictions where you don’t operate, based solely on the information they provide in their initial application.

As you implement these tools, it’s also important to ensure your underwriting and decisioning processes flow smoothly into servicing, collections, and ongoing management. If systems are wholly separate from each other, it can create data silos where each half of your operation doesn’t know what the other is doing. If you use separate software tools for different stages of the account lifecycle, modern API tools can integrate them together into a cohesive, end-to-end system.

Reduce overhead costs with effective lending tools

A loan’s ROI isn’t just the cost of credit weighed against the amount repaid. Every minute that agents spend servicing the account eats away at its profit margins. But modern loan management software provides a wide array of tools to streamline agents’ work or even take it off their plate entirely. Each of these tools can have a noticeable impact on ROI, and when paired together they can significantly increase your capacity for growth.

• Custom automations. Viewing agents’ time as a scarce resource, credit providers have an incentive to automate any task they can, saving their agents’ attention for more cerebral cases and customer interactions. Routine tasks like logging payments, assessing fees, or sending communications can all be automated, and on a modern platform, custom automations allow you to fine-tune those processes to your policies or even individual accounts.
• Borrower self-serve tools. While some borrowers contact their credit providers with complex issues or disputes, many interactions are simple requests for information or minor updates, like switching to a new payment method or changing a due date. Modern platforms enable borrowers to self-serve on their accounts, either through a white-label customer portal or an integration to your existing website or application.
• Guided agent UI. When manual action is necessary, it should be streamlined. Guided UI walkthroughs help agents navigate through complex, multi-step processes, both saving time and keeping them aligned with your policies and compliance requirements. What’s more, agents who aren’t worrying about navigating the software or clicking the wrong button are better able to focus on interactions with the customer, giving them a friendlier experience.

Maximize repayment with borrower-friendly strategies

Lenders have never seen servicing as an opportunity. They’ve seen it as a bad hand of cards that needed to be played with cold, calculating precision in order to minimize their losses. This is exactly the wrong way to look at it.

Alex Johnson

Those are the words Alex Johnson used to describe the way many credit providers approach servicing and collections. When lenders only look at delinquent accounts through the lens of minimizing losses, they’re likely to prioritize near-term partial repayment over a full repayment that may take longer. Expanding your operations’ time horizon allows you to increase the ROI for individual accounts, customer lifecycles, and ultimately your entire business.

Credit providers can drive repayment with data-driven approaches to collections. One example that we’ve seen is a hardship relief program. When a borrower first misses a payment or requests to change a due date, their credit provider can extend them some short term relief by adjusting their payment amount, due date, interest rate, or some combination of those terms to accommodate an unexpected shift in the borrower’s cash flow.

Rather than defaulting and dropping off, the borrower is often able to recalibrate their finances and get back into regular repayment. LoanPro client Best Egg launched two complementary hardship relief programs in the early weeks of the COVID-19 pandemic, helping keep their borrowers engaged as shutdowns and quarantines disrupted their finances. The end results? Best Egg has managed to grow their portfolio, increase margins, and consistently deliver an award-winning customer experience.

Diversified lending with data driven products

Acquiring customers is essential to building a portfolio, but high acquisition costs can dig your ROI into a hole before you even sign a contract. While better or more targeted advertising can of course help bring in new customers, it’s far easier to lower acquisition costs by retaining existing customers and offering them an extended suite of credit products and other financial services.

Some credit providers conceptualize each customer’s “credit journey,” a path between different financial stages, bridged by a sequence of personalized and adaptive credit products. A customer might first apply for a credit builder product, but their actual goal is to secure a better automotive loan through a higher FICO score.

Rather than letting that customer take their business to another lender, you have the perfect opportunity to turn a one-time transaction into a long-term relationship, preemptively reaching out to them with credit offers or details about the products they qualify for. Down the line, you can repeat this process indefinitely, like complementing the loan with an automotive line of credit for repairs and tune-ups, or letting them use their equity in the vehicle as collateral.

As you diversify your portfolio with these products, your ROI calculations should be placed into the broader context of your long-term goals and relationship with the borrower. Maximizing profitability for products early in their customer journey might actually drive down lifetime ROI. While it’s unwise to write off early-stage products as loss leaders, accepting that not every product needs to be a revenue center can open you up to greater long term profitability.

Compliance: A (not so) silent killer

If you were tasked with increasing a credit product’s ROI, your first instinct probably wouldn’t be a renewed focus on compliance. But failing to comply with federal or state regulations can be disastrous, leading not only to major fines—often multiplied by the number of infractions and totalling in the millions of dollars—but also orders to shut down your operations. It may go without saying, but being legally barred from offering credit will definitely do a number on your ROI.

On most systems, too much of your compliance burden is left up to manual processes. This introduces two problems:

• Inefficiency. Manually handling compliance processes will routinely eat up agents’ time, hindering your capacity for growth.
• Risk. Even the best employees are only human. Relying on manual processes practically invites compliance errors, introducing unnecessary risk into your operations.

Lending compliance software, whether offered as a standalone product or as a component of your loan management system, can simultaneously reduce risk and increase operational efficiency. Implementing role-based access controls and guardrails over user actions will keep sensitive information protected, and automations can take care of routine compliance tasks like updating accounts in line with bankruptcies or military lending protections.

FAQs

Have more burning questions about calculating ROI for lending and credit operations? Look no further.

What is the ROI of a loan?

The ROI of an individual loan or other credit product can be calculated as the difference between returns (predicted or realized) and the cost of issuing credit, including both the funds disbursed as well as overhead costs.

Calculating an individual loan’s ROI requires the marginal cost of processing, origination, servicing, and collections, as well as the likelihood of delinquencies and defaults within a portfolio.

• First, calculate the cost for each loan. As a baseline, start with the contract amount that you’re lending to the borrower. Add the marginal cost of managing the loan. (You can derive this figure by dividing your operating costs by the number of accounts in your portfolio.)
• Then calculate the average loan payoff—the total amount the borrower repays on this type of product. Actual payoff could be more or less than the contracted amount, depending on default rates or fees that borrowers incur. If you’re calculating ROI for a new product, it’s best to use predictive models, either with internal or third-party data.
• Compare the average payoff against the cost of the individual loan.

What software do banks use for loans?

Most banks use multiple software systems to originate and service their loans and other credit products, with the total number of software tools typically numbering in the hundreds. These independent systems are all connected to a banking core, but data silos can persist.

In recent years, some banks have begun the process of updating their lending software, either with a full core migration or by consolidating a subset of their legacy tools into a more versatile modern platform. With the advent of better digital technology, banks have transformed their financial supply chains into dynamic, interconnected networks.

Benefits of a loan management system

While most established credit providers will be comparing the ROI of multiple loan management systems (including legacy providers, newer market entrants, and in-house software), startups or other companies entering the lending and credit space might be comparing the ROI of a dedicated loan management system against general-use CRM and accounting tools.

Those credit providers ask a straightforward question: What does a loan management system do? And what tangible benefits does it provide?

Individual platforms will boast their own advantages, but any dedicated loan management system will offer these benefits over generalist software:

• A centralized hub for accounts, borrowers, and stakeholders. A purpose-built loan management software can consolidate your operation into a single operational headquarters. Agents will be able to view accounts, log payments, contact borrowers, and perform other back-office functions, all from within the same window.
• Fine-tuning for different credit products. Generalist accounting software can typically support debit products, and with some finagling might handle simple interest-bearing products. But if you want to launch a wider range of credit products (with different interest rates, repayment schedules, fee assessments, and other terms), it’ll be much easier to configure and support those products from within a dedicated lending and credit platform.
• Debt collection tools. While most CRMs will offer tools for communicating with borrowers, modern lending and credit platforms can integrate those communication tools to your servicing and collections processes. Rather than relying on ticketing systems and manual action to send out payment reminders or late fee notices, these processes can be fully automated.
• Compliance guardrails. Between the FTC, CFPB, and a complex web of state regulatory bodies, lending and credit operations face legal scrutiny from all sides. Overcharging borrowers, missing required disclosures, or misrepresenting yourself in communications can all result in heavy fines, or even losing your lending license.

See how a modern credit platform can impact your returns

Whether you’re launching new products or fine-tuning your portfolio, a data-driven ROI assessment can help you determine which loan management software has the best chances of driving profitability and enabling long-term growth.

To help credit providers in that assessment, LoanPro developed our own ROI calculator. With data from your operations, we can calculate the areas where LoanPro can drive the greatest impact. To see how the numbers shake out for your portfolio, reach out to us and schedule a demo. We’d love to show you what LoanPro can do.