How to reduce loan delinquency with a better payment experience
Delinquent loans are a constant concern for lenders of all sizes. While some level of loan delinquency will be factored into your operations, if that level becomes too high it can have serious negative effects on your business, including increased collection costs and reputational risk.
There are, broadly speaking, two reasons a borrower fails to make a repayment:
- They don’t have the money to make their repayment
- They have the money but fail to carry out the repayment
This article will focus on the latter.
Blockers to successful loan repayments
If the borrower is financially able to pay, you can assume that certain blockers are stopping them from making said repayment.
To understand this better, payment specialists GoCardless surveyed 400 borrowers, all of whom had missed a repayment, as to why they missed their payment due date:
- 34% suffered with technology issues when paying
- 32% didn’t know the repayment due date
- 21% didn’t know how much to repay
With that in mind, here are three tactics for removing these blockers in your payment process:
1) Offer payment methods with low failure rates
One big cause of missed payments is a simple payment failure, and not all payment methods are created equal.
Credit cards, for example, fail 5-15% of the time. This is down to the possibility of credit cards expiring or being cancelled after getting lost or stolen. Failure rates for other methods, such as Direct Debit, are typically much lower.
2) Maximise payment success with retries
Payments fail several reasons, and even with the best payment method, some will still fail on the first attempt. To counteract this, a lender needs to be able to retry payments quickly.
If you (as the lender) are using a ‘pull’ payment method, such as Direct Debit, to collect payments, you have the power to retry the payment. ‘Push’ payments, such as bank transfers, rely on the borrower choosing to retry the payment.
GoCardless found that payments failure rates after three retry attempts can be as low as 0.5%.
3) Provide readily available and accurate payment information for the borrower
91% of borrowers feel it is important to be able to see the status of their repayments.
Looking at your service, can a borrower instantly find out exactly how much they’ve paid, how much they still have to pay and when each payment is due? If the answer is ‘no’, then you have a major barrier to payment success.
Whether it’s through an online login or a mobile app, create a place where your borrowers will always know exactly what they need to pay and when.
Better payments are a huge part of creating a successful borrower experience. GoCardless can help you deliver a great payment experience to maximise payment success, provide greater predictability over cash flow and reduce the costs of managing payments.