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Top 3 Strategies to Decrease Borrower Delinquencies

If any part of your business relies on issuing loans, then you’re familiar with borrower delinquencies. These delinquencies happen for many reasons and are sometimes unavoidable. Too many delinquencies can spell big trouble for your portfolio performance. However, there are simple steps you can take to both stop delinquencies from happening and to make them less painful for your company when they do happen. 

In this guide, we offer three strategies that will help you improve your portfolio performance through proactive delinquency reduction. 

Why Borrowers Miss Payments

When a borrower misses payments, it’s typically for one of three reasons. 

1. They have the funds to repay the loan, but miss a payment due to:

  • Forgetting the payment was due 
  • Not knowing when to make the payment 
  • Not knowing how much to pay

2. They’re unhappy with the product or service received, so they don’t make their loan payment. 

3. They don’t have the funds to repay the loan.

The above reasons fall into three broad categories – communication, fulfillment and financial hardship. Each category requires a different prescription, but the best loan servicing strategy accounts for each scenario with a holistic plan. 

Strategy #1: Communicate, Communicate, Communicate

When a borrower misses a payment because they forgot or didn’t know how much or when to pay, that’s a breakdown in the communication process. The best way to stop these missed payments from happening is with proactive communication. 

Loan servicing providers should initiate frequent communication with consumers in a variety of channels, including electronic forms such as chat, text and email. But before your servicer can communicate with your consumers, you need to ensure you have the proper permissions. At origination, you should capture all relevant personal information and gain permission to contact consumers through email, text and other channels. Your contract should also ensure that those permissions carry over to your third-party loan servicing provider. 

This captured contact information and permission help your loan servicer establish strong lines of communication. If your loan servicer can send a text or email every time a payment is due, that will greatly reduce the number of borrowers who forget or don’t know when to pay. 

A strong communication strategy should also extend to your online loan servicing platform. A mobile-responsive consumer portal makes it easy for consumers to check their balance, make a payment or ask a question. And don’t forget to offer bilingual communications if a high percentage of your borrowers speak a language other than English.

The takeaway: Strong communication eliminates missed payment excuses. Make sure you get the information and permissions needed to for you and your loan servicer to communicate with your consumers. 

Strategy #2: Make Strong Escalation Management Plans

Sometimes borrowers won’t repay a loan because they’re not happy with what they bought. For example, if a consumer takes out a loan to purchase a vacation ownership property, but can’t book the dates they want, they might decide not to pay. Or, if a homeowner secures a loan for solar panels and is unhappy with the installation, they may also stop paying. 

Whether you’re responsible for the actual product or not, as the loan originator it’s your portfolio that will suffer if a borrower misses a payment. 

Overcoming borrower dissatisfaction takes a loan servicer working with you, as an originator, to solve the problem, and that means you need a strong escalation management plan for all parties.  

Here’s how a simple escalation management plan typically works:

When an account becomes delinquent, the loan servicer will contact the borrower to determine why a payment has been missed. If the missed payment is due to dissatisfaction with the product, the servicer will note the account and gather as much detail as possible. The servicer should then put a pause on the account and escalate the issue to the originator for follow-up within a specified time frame. Once the issue has been resolved, the servicer can then restart payments. 

While this process sounds straightforward enough, consumer fulfillment issues are rarely simple. Third-party loan servicers often must act as a facilitator to start a dialogue between the borrower and lender, and that means they must have strong communication skills. 

You can make sure your third party has the right interpersonal skills by asking them to provide you with consumer call recordings or by auditing live calls.  You’ll also want to put clear expectations in place so that as they act as an extension of your team, they represent your brand appropriately. 

The takeaway: Sometimes borrowers stop payments to signal dissatisfaction with what they bought. Before starting the collections process, your loan servicer should work to understand the issues, escalate concerns to you and work with you to restart payments once the issue has become resolved.

Strategy #3: Be flexible and understanding

If your consumers stop making payments because they don’t have the money, the first thing you want your loan servicer to do is determine if this is a short-term issue or a long-term issue. 

Short-term financial issues might be an unexpected car repair bill or a medical bill. With these types of situations, you can allow your loan servicer to work with your consumers to get them current through a payment plan. This may mean they make an extra monthly payment, or you put a hold on late charges. 

You may determine that a consumer is missing payments due to a long-term financial issue, such as the loss of a job or a medical disability. In these situations, you might give your loan servicer the option to offer a loan deferment program. 

Nobody wants to find themselves in a situation where they can’t pay their bills. You and your loan servicer should offer these consumers respect, empathy and ultimately flexibility. When a consumer has a positive experience with your brand – especially in times of hardship – they’re more likely to prioritize making payments to you over other creditors with whom they may have a negative experience. 

The takeaway: No matter what type of program you devise to help those going through financial hardships, it’s important your loan servicer works with your consumers in a way that is understanding and compassionate.

The Final Word

Some level of delinquency is inevitable, but that doesn’t mean your hands are tied. The first line of defense is to create strong communication channels and policies to prevent missed payments before they happen. When a delinquency does occur, you need to determine the reason before going straight to collections. Whether a delinquency is due to product dissatisfaction or financial hardship, working with your consumers in a collaborative way can help you get payments restarted faster.

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