Observations on Lending as COVID-19 Spreads Globally
I hope you’re all safe and healthy out there. I’m seeing a couple little ripples in lending amongst Moneylender users, and I though you might find the observations interesting.
The story told by Moneylender sales…
Sales slowed for the first several months of the pandemic, and then sort of adjusted back to regular levels. The collections freezes and proffered forbearances in March and April of 2020 made the lending industry hold its breath. Once the job situation began to stabilize, we could see who would be losing their jobs and who would remain employed.
We saw a surge in Moneylender sales as people adopted our software to help with their workload as refinances and reinstatements were officially structured into debts around May. In spite of the surge, the overall sales numbers were depressed throughout 2020, alongside an apparent slump in new debts among Moneylender users, and I would speculate that uncertainty for the future is causing people to avoid new purchases, debts, projects and ventures. We’re all hunkering down and it’s slowing the use of debt.
While personal, short-term loans still seem to be slower than typical, the very low interest rates available are partially propping up real-estate backed mortgages and other debts that can be refinanced. New debts are being eschewed while existing debt is generating some churn to keep the industry idling.
The story told by AutoPay payments…
While Moneylender sales are an interesting bellwether for how willing people are to take their chances, the payments through AutoPay have begun to sing the song of how faithfully those chances are being fulfilled. AutoPay is only in use by a statistically miniscule number of lenders (eighteen at the time of this writing), but patterns are emerging nonetheless. The lenders using AutoPay are quite varied, and their loans represent a fairly continuous spectrum of the lending industry as a whole.
An important caveat: AutoPay is only able to process payments in the USA, so any meta-analysis of those payments is limited to that single country. It’s quite likely that the global pandemic is having similar effects in other countries, however.
In the last week of August, it seemed like many borrowers’ bank accounts had simultaneously run dry. The rate of returns for insufficient funds tripled, and has stayed higher than normal. Even more stable debts like mortgages saw higher rates of bounced payments. These higher rates of failed payments are only very slowly tapering off.
Because AutoPay only processes payments and knows nothing of the status of the underlying loans, I could only guess at how loans are performing overall. What I can tell for sure is that people were taken by surprise by their sudden lack of funds. Instead of recognizing there would not be enough money and cancelling the payments to avoid NSF and overdraft fees, the payments were allowed to process and fail. This spanned loans and lenders of all types.
What useful takeaway might we get from looking into the payments and sales figures? Certainly that people don’t know what to expect right now, that funds are scarcer than normal, that core income has been affected noticeably, and that many borrowers did not have a contingency plan to fall back on.
You, my savvy lender friends, might offer a contingency plan to your borrowers that allows them to save face and save money in the short term, while ultimately garnering for yourself some additional profit, stability, and loyalty.
Consider your borrowers, consider how you might address unexpected partial or total income loss. Reach out to your struggling borrowers with a reasonable escape path for them. If you are careful when you help them out of their difficult situation, you will likely be putting yourself higher on their priorities list.
My standard advice applies even more so when “doing someone a favor.” Posture yourself as the absolute authority. The seriousness of the debt, and your credibility must remain fully intact. If they start to see you like a buddy or a rich aunt/uncle, you will be facing an uphill battle to make a profit from their debt.
Carefully review any letters or conversations you plan to make, ensure your position will confirm in the borrower’s mind that their dutiful repayment is not optional. Speak calmly and directly, avoid blame or criticism. State clearly the borrower’s situation and how your propose to allow them to proceed. Never do this for free. As soon as you cut them some slack, cutting slack is how you’ll be known. If you cut some slack, for example, in allowing them to skip a missed payment, you must pick up the slack elsewhere, such as capitalizing the accrued interest.
With some though and effort, you can help to relieve your borrower’s immediate worries, enhance their opinion of the debt you hold over them, and make for yourself a little extra coin down the road. Good luck and happy lending!