The warning signs are all around us: many consumers are financially stressed. Already, consumers are getting squeezed by high inflation and high interest rates. And now, the resumption of federal student loan debt will add to their financial pressure. New home and auto purchases are costing consumers more in interest finance charges than they have in recent years. Wage growth is also slowing. Plus, the holiday season is already upon us, which will compound financial stress for many.

What does this increase in consumer financial pressure and economic tightening mean for lenders? It signifies the importance of lenders taking a proactive and frequent approach to assessing customer risk. 

The numbers show a concerning picture of consumer finances that lenders need to take into consideration:

• 60% of consumers reported living paycheck to paycheck.(1)

• Consumer spending has exceeded real disposable income since 2021.(2)

• Federal student loan payments expect to add about $244 to borrowers’ monthly debt commitments.(3)

• 70% of Americans report being stressed about finances.(4)

These statistics show a very uncertain time for consumers - and for financial institutions that lend to them. Some consumers will continue to meet all of their financial obligations, and some will struggle. Some consumers will cut back on spending to better manage their finances, while others will decide to accumulate more debt or skip loan payments in order to meet their day-to-day needs. Some consumers will prioritize home or auto loan payments over other debts, while others will choose to make minimum payments across all of their loans. 

The pressure is already starting to show: credit card delinquencies over 30 days have hit 3.8%, while auto loan delinquencies are at 3.6% - the highest they have been in 10 years.(5) 

How can lenders better assess the degree of financial pressure amongst their customers and spot borrowers that are most at risk of delinquency or default? 

Start with the basics: Conduct account reviews 

Most lenders conduct account reviews. But occasionally we hear that a lender has not reviewed their accounts in years. Are they scared of what they might find?

Account reviews can yield quick insights on which customers present risk. Focus reviews on identifying customers that have:

• taken on new credit,

• increased utilization, 

• only made minimum payments, 

• recently missed payments, 

• or experienced credit score changes. 

You might discover that there are segments of your customers that hold more debt than you realized, or that have skipping payments for loans held at other firms. 

Make sure you have the right metrics in your account reviews

Most companies rely on a standard set of credit scores and attributes to conduct their reviews. But with all the financial pressures that consumers are facing today, additional insight may be needed. To help, lenders can incorporate market-driven attributes packages and specialty finance attributes that are designed to address specific types of risk:

• Student loan attributes can help identify which customers hold student loans and then segment them by metrics. These metrics include balance, payment history, delinquencies and more. We have found that the average federal student loan debt is about $31,000 to $43,000 - and that total federal student loan debt ranges from 4% to 10% of overall consumer debt. Even lenders that do not hold student loan debt can benefit from these attributes - about 20% of their customers likely hold student loan debt at another lender.(6)

• Inflation and rising interest rate attributes can help identify which customers may be at risk of default due to these economic changes. For example, gain insight on how customers with a variable annual percentage rate (APR) will handle an increase in rate.

• Specialty finance attributes can help identify customers that have turned to alternative sources for financing needs such as short term loans, installment loans, and lease-to-own/rent-to-own applications. If your customers are newly using these types of alternative financing options, it might be an indicator of upcoming delinquency for loans held at your firm.

Consider ability to meet debt obligations

Groceries, dining out, gas, insurance - there are many categories that are getting more expensive. Plus add student loan payments on top of these expenses. 

Many consumers will be able to afford to pay high prices, student loan payments, and whatever else is thrown their way. But some will not. Lenders need to be able to understand consumers’ financial resilience so they can assess which of their customers are more - or less - likely to be able to keep spending, plus meet their debt commitments, even when under financial stress.

Consumer financial durability and resilience are important for lenders to understand - even amongst customers with high credit scores:

• In an analysis of prime and super-prime federal student loan borrowers, we found about 26% have low financial durability and are unlikely to have the resiliency to meet all of their financial obligations.(7)

Increase account review frequency

When it comes to accurate risk assessment, frequent reviews can make a huge difference. That’s because annual reviews may not be enough to recognize the fast-paced changes in consumers’ financial lives. Consider these points:

• Increasing the frequency of account reviews to identify early risk and retention signals can increase cost savings by between 40%-50% on newly identified dollars at risk.

• Shifting from annual to quarterly reviews could increase the dollar amount of exposed risk you could hope to save by 3.5 times. And shifting from annual to monthly could yield a 6 times increase.

• For every month that passes, there could be an estimated 50% degradation in loss mitigation efficacy.(8)

With a more proactive approach to account management, lenders can better understand potential risks in their portfolio and spot troubled accounts earlier. 

To help you get started, please email our risk advisors for a consultation: riskadvisors@equifax.com. Plus learn additional tips to enhance your account management strategy.

 

1. LendingClub/PYMNTS survey as reported by CNBC, Sept. 27, 2023. 

2. Bureau of Economic Analysis, July 2023, as reported by Keybridge Research LLC, 2023.

3. The student loan crisis white paper, Shur℠, Equifax, and VantageScore®, July 2022.

4. CNBC Money Survey conducted in March 2023 as reported by CNBC, Sept. 27, 2023.

5. CreditForecast.com, July 2023.

6. Equifax analytics.

7. Equifax analytics.

8.  Equifax analytics.