One of the key challenges in collecting on unsecured installment loans is providing the borrower an incentive to continue to making payments when they come under financial distress. If you don’t make a payment on a credit card you can’t keep charging on it. In the case of a house or a vehicle loan, the lender can repo/foreclose on the secured asset. On an unsecured loan, the borrower has already received the funds – so there is no loss of utility when they stop paying.
One way Prosper has been successful incenting distressed borrowers to pay is by offering alternative payment arrangements. If borrowers contact us before they have become 30 days past due, we can arrange an alternate payment schedule. If they meet the promised payments, we can continue to report the account as “Current” with the Credit Bureaus. We’re not waiving interest, we’re not waiving late fees, we can’t change how the loan appears on the Prosper Site – all we’re doing is not dinging the person’s credit report. It is a carrot.
Starting in December, we have used this carrot for borrowers who contact us prior to being placed with collections (less than 31 DPD). We require an explanation of the “hardship” which is causing the problem with the payment schedule (usually loss of a job). We do not over scrutinize the hardships documented. What we are looking to do is to reach a monthly amount that the borrower will continue to pay for some period of time (usually 3 or 4 months). Even at a reduced amount, if we can keep them paying, it is dollars flowing to lenders. In addition this can build goodwill with borrowers and improve the future payment performance on loans.
Since December, we have logged 327 of these plans. As of today, 251 of them are still active – that is an excellent retention rate. Right now this is one of our most effective tools to continuing payments for lenders.
We are working on a major system project that will provide the tools that would allow us to extend this procedure to an “outreach” for all borrowers who exceed 15 DPD.
Is it just giving away money? No. We are not changing the interest rate – so the situation is one of “funds delayed” not “funds abandoned”. As long as people keep paying, it is a good thing. One advantage of these payment plans is that they do not incur Collection Agency Fees. To date, this program has accounted for more than $225K in payments —some portion of which would not have received lenders.
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