It's not likely most lenders or credit card issuers would jump at the chance to give more money to a customer having trouble making payments. But for some borrowers, that may be the best solution to this problem.
In many cases, a delinquent borrower just needs a chance to obtain extra money to stabilize their payment regimen and avoid a ding to their credit score that would scare away most lenders, according to recent research from credit bureau and global consumer researcher TransUnion.
The study cited as many as 31% of delinquent borrowers experienced improvement on one or more of their delinquent debts when securing a new personal loan. In addition, 24% of those borrowers also performed well on the new loan.
"Many of these borrowers looked great on the new loan and, a year out, did not miss any payments," said Kristen Bataillon, a co-author with Matt Komos of the study for TransUnion.
Chicago-based TransUnion studied 30,000 borrowers who originated unsecured personal loans in 2017. To compare behaviors, the study involved 15,000 borrowers who were current the month prior to loan origination, and 15,000 who were delinquent prior to taking out a loan.
TransUnion sought to illustrate that a segment of the population is predictable in that an extra loan would help them make current and future payments — and that lenders could help themselves by knowing which ones are favorable candidates.
By using traditional and current trend data to better understand a borrower's situation and history, a lender can avoid late payments or a default on a loan, the study predicted.
The borrowers who benefited the most from an extra loan were those facing credit card debt, most likely because they represent the type of consumer who simply ran into unexpected expenses for health, family, auto or home. Thus, those considered "distracted" borrowers who were late, but never more than 60 days late on a payment, were nearly equal in number to those considered "struggling," or always carrying payments 60-plus days overdue.
"If I had missed two payments on my credit card, I would be considered to be in this study, so the question was whether I could become current on those payments if I had a new loan, and pay on that as well," Bataillon said. "And the answer is yes on a quarter of that population we looked at."
Improving technology plays a role in guiding lenders to decisions about delinquent borrowers, said co-author Matt Komos of TransUnion.
Generally, a certain segment of consumers will always revolve a balance on payment cards or outstanding loans because that is how they manage their finances, Komos said.
"The idea is that there should be financial inclusion and an ability for consumers to have access to that credit and at a fair price," Komos said.
With fewer delinquent payments and more options to help borrowers, the door opens for more competition in the market. "Overall, consumers win," Komos added.
Part of TransUnion's research was based on the premise of how a lender should approach the delinquent borrower situation if the economy were to take a sudden downturn.
"When you see an uptick in delinquency, that is the best way to handle this," Bataillon said. "On the collection side, they may see additional struggles and maybe unemployment, which can be short term, so providing an extra loan is not conventionally thought of at that time."
But banks are in the business of making money and they need to continue to originate loans, she added.
"If you still want to be putting loans out there, this is an avenue to consider," Bataillon said. "If you are smart about it and look at what consumers have, it is an opportunity to still help create and build a consumer base from those maybe facing a moment of crisis."
