Loan delinquency management

I. Introduction to loan delinquency management

Loan delinquency management refers to any processes lenders use to encourage repayment when borrowers fall behind on their debt. Ranging from quick due date reminders to repossessions, delinquency management encompasses a wide range of activities all aimed at preventing credit loss as efficiently and inexpensively as possible.

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As an account falls deeper into delinquency, credit providers gradually increase the severity of their collections efforts. If reminders prove ineffective, a delinquent borrower might see any number of punitive measures included in their contract:

• Credit score damage. Many credit providers report payments to credit bureaus. Late payments will lower a borrower’s credit score, making it harder to get credit in the future.
• Fees. Most contracts include stipulations about late fees, and failing to pay down the principal balance on the original schedule will lead to more interest accruing over the life of the account.
• Wage garnishment. Courts may order that a portion of the borrower’s income go directly to the lender until the debt is repaid.
• Repossession. If an account is secured with collateral (like a vehicle or other property), the lender may seize and sell them.

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It’s worth noting that these strategies largely exist to disincentivize delinquency, rather than repair it. Even with wage garnishment or repossession, a lender might never recoup the full value of the loan. 

II. Strategies for managing and reducing loan delinquencies

Most collections strategies include measures for preventing and addressing delinquency, although not all strategies manage delinquency effectively. 

Credit providers can decrease their delinquency rates by first understanding the differences in the root causes of delinquency, and then by implementing proactive strategies to keep borrowers repaying on schedule.

Strategies for handling different kinds of delinquencies

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Delinquencies don’t all look alike. They can stem from a wide range of causes which sometimes overlap:

• Loss or reduction of income. Job loss, divorce, and business closure are all among the top causes for borrower bankruptcy. (Divorce can be financially akin to job loss when a household goes from two incomes to one, often as expenses increase.) When borrowers report these major losses of income, creditors need to reassess their ability to repay their debt, and if necessary consider a refinancing product to mitigate the risk of a full default.
• Unexpected expenses or emergencies. Major expenses can disrupt borrowers’ cash flow, making it difficult to keep up with their original payment schedule. In these cases, lenders should reach out to borrowers and discern whether this is a temporary setback or a long-term change. A one-time expense might throw off a borrower until their next paycheck, but shouldn’t impact long-term repayment. In these cases, offering some leniency through a hardship program can go a long way towards building loyalty and keeping customers engaged. For long-term disruptions, consider extending a refinancing product to help borrowers get back into a sustainable repayment schedule.
• Fraud or identity theft. The worst-case scenario for a delinquency is to learn that a borrower wasn’t actually who they said they were, and have no intention of repaying you. Whether they stole someone else’s identity, impersonated a deceased person, or created a synthetic identity, the end result is the same: default. In these cases, the best a creditor can do is to prevent most fraud, and streamline their processes for detecting and verifying fraud cases so they minimize resources spent on accounts that won’t repay them.

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Proactive Measures to Prevent Loan Delinquencies

At the same time that a credit provider underwrites a potential borrower, they can begin implementing their strategy for reducing defaults.

Verifying an applicant’s identity and creditworthiness are the first steps. Every default or fraud eats away the profits from multiple healthy accounts, so rejecting even a marginal number of bad applicants can have an outsized impact on portfolio performance.

At the same time, lenders should use origination as an opportunity to communicate the consequences of repayment and delinquency to borrowers. Many borrowers proactively seek out credit builder products, so understanding that you report to the bureaus can increase your chances of repayment. Similarly, knowing the possibility of penalties like fees, greater interest accrual, wage garnishment, or repossession might deter a borrower from skipping payments.

Regular reminders throughout the account lifecycle help ensure that repayment remains a priority. Rather than just pointing towards penalties, though, lenders can also take a more positive approach, showing borrowers their progress toward repayment, how they’ve increased their credit score, or new credit products that they qualify for.

III. Leveraging technology and economic understanding in delinquency management

Many lenders successfully mitigate default risks with modern credit management tools, especially when they pair those technologies with an appreciation for borrowers' economic incentives. This involves both recognizing the financial motivations and constraints that drive borrower behavior, as well as using modern analytics and outreach tools to proactively identify at-risk accounts.

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Credit providers leverage modern lending technology and knowledge of consumer behavior throughout their account lifecycle to help lower delinquency rates:

• Predictive analytics. Before a credit product is ever extended, modern decisioning engines and underwriting tools can connect application and third-party data to predictive models, offering credit providers a clearer picture of how likely borrowers are to repay. 
• Customer outreach and engagement. As borrowers begin repayment, lenders can use outreach tools to keep them engaged and aware of repayment options. With ongoing portfolio monitoring, a lender can detect accounts that are at risk of delinquency and proactively offer them hardship programs and alternate payment plans to prevent full defaults. Even simple payment reminders (delivered through email or interactive SMS) can keep borrowers up-to-date with due dates without much difficulty.
• Secured credit. While unsecured loans and credit cards are more volatile, secured credit products tend to have much lower default and delinquency rates. Borrowers are understandably averse to losing cars, homes, stocks, or other collateral in a repossession. Still, some credit providers avoid secured products because they lack the infrastructure for tracking and recovering collateral. Rather than securing accounts with tangible assets, however, they can back them with money from a specialized credit builder product. Borrowers make regular payments to build up a small sum they can borrow against.

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Reducing your delinquency rates

Across the industry, delinquency and default rates are on the rise. Strategies that worked over the past decade may find themselves straining to keep up with a more volatile market, and credit providers who don’t take proactive steps to bolster their collections efforts can expect their margins to compress. 

If the upward trend in delinquency has your team strategizing, reach out to us. LoanPro’s collections suite is a proven tool for keeping customers engaged and reducing delinquency and default rates, all while streamlining work for collections agents. We’d love to talk through your collections strategy, hear what’s working, and show you how LoanPro drives repayment.