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An Unexpected Remedy for Delinquent Borrowers: A Second Loan

An Unexpected Remedy for Delinquent Borrowers: A Second Loan

Wednesday, 08 May 2019 02:55 PM

Certain consumers who are delinquent on a loan can do something unconventional to help them catch up on payments: take out new debt. That’s the conclusion in a new study from credit reporting firm TransUnion.

'It is counterintuitive, which makes it so exciting,' said Kristen Bataillon, co-author of the study and senior manager of research and consulting at TransUnion, in an interview. 'We found that if you were to provide certain consumers that were delinquent an additional loan -- in this case, an unsecured personal loan -- about one-fourth cured on the old loan and also performed well on the new loan, a year after taking it out.'

That sub-group of delinquent borrowers is the one TransUnion recommends lenders target for a new personal loan.

By no means does this apply to the vast majority of delinquent borrowers. Conventional wisdom still applies, in most cases, that it’s safer to originate a loan to somebody who is current on all loans. But for a certain subset of challenged consumers who have a longer credit history, a greater number of open accounts and a larger percentage of their debt in revolving credit (such as bank cards), this additional injection of liquidity may benefit them, the study released Wednesday shows.

Moreover, the borrowers who benefited from a new unsecured loan were most likely going through some sort of temporary liquidity constraint, including acute events such as accidents, unexpected medical bills, or unanticipated auto/home repair bills.

'The customers who benefited the most had more experience with credit, and they were probably going through some short-term struggle at that point in time,' Bataillon said. 'These people were likely more knowledgeable about how to use credit, so they can smartly use the new loan to get the best outcome possible. This new loan gets them over that hump.'

TransUnion studied 30,000 non-prime, delinquent borrowers in 2017, and compared the performance of delinquent consumers who took out no new personal loans with those who are delinquent and originated a new personal loan. Those with bankruptcies on file were removed from the sample population.

The study noted that a combination of so-called trended data -- an enhanced deep-dive into a consumer’s recent credit performance -- and traditional credit attributes can help identify borrowers who are most likely to benefit from a new loan. TransUnion created a scoring model to pinpoint which delinquent consumers would most benefit from a new unsecured loan.

The agency says the insights from the study could lead to a template that could be a win-win for both the customer and the lender, because if the new loan performs, the personal-loan lender is profiting while creating an additional form of loyalty and relationship with the consumer.

'I didn’t see a huge volume of lenders doing this; enough to be statistically significant,' Bataillon said. “And there weren’t enough of lenders doing it on their own customers.” Offers of new personal loans typically came from other lenders.

'But we think this is actionable and may be something lenders may think to do on their own.'

© Copyright 2019 Bloomberg News. All rights reserved.

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Certain consumers who are delinquent on a loan can do something unconventional to help them catch up on payments: take out new debt.
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Wednesday, 08 May 2019 02:55 PM
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