Loan management

I. Introduction to loan management

Loan management refers to the many processes involved in extending credit to borrowers. Encompassing everything from loan origination to servicing, collections, and ultimately payoff and account closure, loan management involves many smaller components and varies significantly from industry to industry.

The components of loan management

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Loan management strategies typically break loan management  down into several stages, following the lifecycle of each individual account:

• Loan origination involves attracting applicants and assessing their risk through credit underwriting. 
• Loan servicing begins with disbursing funds to borrowers, and continues throughout the account lifecycle with repayment and account maintenance. It includes both customer service activities (like modifying accounts or giving borrowers due date reminders) as well as legally-mandated processes, like adjusting accounts to align with a bankruptcy settlement or complying with military lending protections.
• Collections efforts are any actions credit providers take to get money back from delinquent accounts. Traditional collections methods include contacting borrowers and adding late fees to their accounts, but many credit providers have begun emphasizing borrower-friendly collections strategies that help delinquent borrowers stay engaged through financial hardship.
• Payoff and account closure mark the end of an individual account. While some open-ended accounts can be kept active indefinitely, credit providers still need to manage accounts when borrowers decide to close them, lose contact, or default on their debt.

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Loan management strategies and requirements also vary from industry to industry. For credit providers who secure their loans with major collateral, like automotive lenders and lessors, recovery and auctioning is another major component of their loan management. Financial institutions and neobanks might use credit to build relationships with borrowers and then offer other financial products and services, so their loan management strategies will include more touchpoints with borrowers and greater concern over the customer experience.

Objectives of loan management for lenders

Loan management strategies generally aim for similar key objectives: increase margins, reduce risk, and drive customer loyalty.

First, credit providers aim to increase margins through streamlining and automation. Even when borrowers repay their debts, the total amount might only be a modest increase over what was initially lent to them. If a lending operation is bogged down with inefficiencies, that profit margin gets even thinner.

Loan management strategies also seek to reduce the risks of delinquencies, defaults, and compliance violations. Defaults and regulatory fines can quickly negate the profits made from multiple other accounts. Strategies for reducing defaults involve both underwriting and decisioning efforts made before any credit is extended, as well as collections efforts to keep borrowers engaged and repaying throughout the account lifecycle.

Lastly, a key loan management objective for most credit providers is to provide a quality customer experience. Acquiring new customers is expensive, but delivering a convenient and personalized experience can be the difference that makes consumers come back to a specific credit provider, saving them the costs in origination.

II. Benefits and features of loan management systems

A loan management system (LMS) is a software that helps credit providers handle their credit products throughout the account lifecycle. This contrasts with general-use CRM and accounting tools, which lack the specific tools for managing loans, calculating interest and repayment, and complying with lending regulations.

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While LMSs vary in their scope, the tools they offer, and the range of products they support, they do share some similarities. Most LMSs offer at least some of these benefits (to varying degrees):

• Enhanced operational efficiency. Centralizing data and processes helps reduce time lost switching between systems, and reduces data silos, and automation can significantly increase the number of accounts each agent can manage.
• Risk management. Even rudimentary restrictions help prevent human errors. More advanced platforms automate compliance tasks and implement guardrails to align human actions with regulatory requirements. Integrated analytics can also help detect delinquencies and test collections strategies.
• Customer experience. Using an LMS as a hub for borrower interactions helps credit providers manage communication, provide timely replies, and keep customers engaged and repaying.
• Growth and scalability. By reducing manual work and centralizing data, an LMS enables credit providers to scale their operations beyond what they could manage with generalist software.

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While any dedicated loan management system will aim to provide these benefits, those outcomes are hardly guaranteed. Success in a loan management strategy often hinges on pairing a lending operation with the right LMS, and that requires a knowledge of the different types of platforms on the market.

III. Types of loan management software and platform options

Before you can calculate the ROI a specific LMS offers, it’s helpful to assess the different options available. While there are dozens (if not hundreds) of specific LMS providers and tools, they can also be broadly categorized into similar groups. 

Two common frameworks for categorizing LMSs are by the age and maturity of the system, or by the purpose it is built to execute.

Legacy solutions and new market entrants

Older solutions have long served the lending and credit industry, with some boasting a track record that stretches back decades. While they remain serviceable tools, they may lack the flexibility and configurability of more modern tools. Multiple providers have launched their newer LMS tools over the last decade, but these might not provide the same stability and scalability as their older counterparts.

While categorizing by maturity makes sense for a broad understanding of the market, it can also be misleading. Some legacy LMS providers have gone to great lengths modernizing their system, adding APIs, automation tools, and cloud-based data storage. And some newer systems are architected for scalability and sustainability, making them viable competitors to legacy providers.

‘Legacy’ and ‘newcomer’ remain useful shorthand for two broad categories of loan management software, but a deeper analysis will inevitably lead credit providers to compare the specific tasks that each software performs.

Different types of loan management software

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Many lending software tools are marketed for the specific tasks they solve. There are a few major categories:

• Loan origination system (LOS). An LOS processes applications, vets borrowers, and approves or rejects them. These might all be consolidated into a single software application, or they might be separate components (like a front end application, underwriting system, and decision engine) all connected to form a holistic system.
• Loan management system (LMS). LMS generally refers to a software used for servicing, collections, borrower communications, and reporting, but some LMS platforms also incorporate elements of loan origination, giving users end-to-end support.
• Credit ledger. A credit ledger tracks debt, payments, and fees, and calculates interest, but typically doesn’t perform other servicing and collections tasks. Many LMS systems are built on top of a core ledger, but others might use a ledger for accounting and then use other tools to contact borrowers.
• Generalist software. Some credit providers use software that was designed for accounting or customer relationship management in general, but not lending in specific. These systems may suffice for small portfolios, but typically struggle when managing a larger quantity of accounts.

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LoanPro’s modern credit platform

Modern loan management solutions are essential for meeting the challenges of increased borrower expectations, evolving regulations, and rising delinquency and default rates.

LoanPro’s modern credit platform powers hundreds of lending operations, giving providers tools to drive efficiency, compliance, loyalty, and growth. We’d love to show you how LoanPro can enhance your credit and loan management.