When it comes to paying bills, some people have a million excuses (both valid and invalid) for skirting their obligations. Unfortunately, lenders constantly deal with borrowers' excuses when it comes ...
In his Q3 Economic Outlook for Financial Institutions, SWBC’s Chief Economist, Blake Hastings, provided the following insights on rising consumer credit and deteriorating borrower balance sheets:
Consumer balance sheets are still relatively healthy, today, thanks in large part to the rounds of stimulus during the pandemic. Those savings have been spent and credit card usage has risen an astonishing 13% quarter-over-quarter.
This indicates that with high gas and food prices, consumers are turning to their credit cards to make ends meet. This deterioration in consumer balance sheets will continue as long as inflation outpaces wages.
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- Delinquencies are beginning to pick up as consumers feel the strain. According to Cox Automotive, auto delinquencies were up 30% year-over-year in May. Subprime auto loans more than 60 days past due are at 5.36% of total subprime loans, higher than their pre-pandemic levels.
- After several months of record lows, mortgage delinquencies rose in May by nine basis points to 2.84%.
- According to the software and data analytics firm Black Knight, the number of borrowers one payment past due rose 5% in May over April and even 90-day delinquencies picked up 1% after 21 months of decreases.
- While still down 40% from pre-pandemic levels, foreclosure starts were up 27%. Similarly, prepayment activity was down 7% in June and 64% from a year ago.
Almost every data point one can look at on the health of the consumer’s balance sheet is deteriorating. This will inevitably curtail overall demand, particularly for new homes and autos, and slow economic activity in turn. It will also represent a challenge for financial institutions grappling with this deterioration of the assets on their balance sheets.
Positioning Products that Help Protect Your Borrowers’ Credit Is More Important Than Ever
The latest data suggests people are charging more to their credit cards. This isn’t inherently bad when you’re able to keep your balance down and pay your bills on time. Unfortunately, even the most financially stable borrower can be hit with bills they can’t pay when illness, injury, or death eliminates a family paycheck—causing damage to their credit score.
If your financial institution wants to offer your borrowers value by helping protect their credit in such circumstances, consider recommending payment protection products like credit life and disability and/or credit involuntary unemployment insurance, or a comprehensive debt cancellation package.
If your borrowers are armed with the protection these products can provide, when unexpected circumstances like job loss, disability, or even death occur, their loan payments will be covered for a specified amount of time and/or be paid off in full depending on the coverage.
Benefits of Offering Payment Protection for Your Borrowers
Benefits for your borrowers include:
- Financial protection
- Affordable rates
- Monthly fees for the coverage incorporated into their loan payment
- Credit rating protection as loan payments are kept current
- Convenience with qualification
- Protection options include disability, job loss, or death
Benefits of Offering Payment Protection for Your Financial Institution
Payment protection products certainly offer protection for your borrowers, and it also helps your financial institution manage default risk.
Other benefits of offering payment protection for your institution include:
- Increasing borrower loyalty and satisfaction
- Rising fee income potential
- Streamlined integration with the lending process
The lending industry will never achieve zero delinquencies, but with a possible recession looming and credit card delinquencies on the rise, it's important to implement programs that will minimize losses and protect against risk whenever possible.
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