What’s the best way to help someone who’s fallen behind on their debt payments? Why, give some of them another loan, according to a new TransUnion study.
About one in four borrowers who take out a small, personal loan after suddenly going delinquent on other credit obligations are able to right their financial ship and stay current on all payments 12 months out, the credit bureau found.
TransUnion hopes the counter-intuitive research convinces some lenders to help existing customers who hit a rough patch by extending a new, short-term loan. For everyday Americans facing an unexpected money problem – a car repair, medical bill or government shutdown – an influx of cash could be a lifeline.
“We think most of those borrowers are trying to get over a hurdle,” said Kristen Bataillon, senior manager of research and consulting at TransUnion. “It’s an acute situation and they need someone to give them a hand to get through that hard time.”
Who could be helped?
Not all past-due borrowers benefited from a new loan. The other three-quarters in TransUnion’s study fell into three buckets. Some got up-to-date on the old debts but not the new loan. Others stayed current on the new loan, but remained delinquent on existing debts. Or, in the worst case, some borrowers became past due on both.
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So, who is likely to be helped by a new loan? The credit bureau fingered four attributes. These borrowers:
- Had at least one credit account that was 10 years or older
- Had on average at least eight open and active credit accounts
- Had more credit card accounts
- Had opened fewer accounts in the past two years
These are experienced borrowers who have demonstrated responsible payment behavior in the past, said Matt Komos, vice president of research and consulting at TransUnion. “These are consumers who have the willingness to pay but not the ability in that moment,” Komos said.
The majority of borrows in the study took out small personal loans between $500 and $2,000 and often from a new lender to get them through their financial emergency. “The loan amounts don’t have to be that large to make a difference,” Bataillon said.
Short-term loans at a time of need could help some segments of Americans who struggle with cash crunches and uneven income.
A Federal Reserve survey last year found that four in 10 of Americans couldn’t pay for a $400 emergency with cash on hand. Instead, most would rely on a credit card, borrow from family or friends or sell something. Three of 10 would not be able to afford the expense at all.
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Many lenders now are willing to work with struggling customers by deferring payments. But a loan could help not just getting up-to-date on late payments, but also provide much needed cash for other immediate expenses like gas and groceries.
Still, borrowers shouldn’t jump at a short-term loan if it’s offered. Do your research, only borrow what you need for the financial emergency, and make sure the terms are reasonable, says Bruce McClary, spokesman for the National Foundation for Credit Counseling. Consult a non-profit credit counselor if money issues persist.
“A loan might work if the situation is a temporary issue,” McClary said. “But if other things don’t change significantly, you can’t borrow your way out of a long-term financial crisis.”