What is the cost of making a late loan payment? If you’re like most people, you probably think of late fees. But there are also less visible, longer-term consequences that can have a serious impact on financial wellbeing. For example, late payments affect credit scores, which in turn can affect the ability to access credit later—and people are not always aware of these impacts. While in our daily lives we’re surrounded by messages about the importance of monitoring these scores, with plenty of free products for doing so, when is the last time you actually checked your credit score? And what are you supposed to do with that number and all the complex, unseen factors that produced it? It’s no surprise that most of us are left confused and don’t often take active steps to improve our standing, even though it can affect access to future credit.
Case in point: in a national 2015 survey, 35% of Mexicans reported the rejection of a loan application due to problems in the Credit Bureau. This is due at least in part to the fact that nearly 30% of people had a credit score of 660 or below (which lenders consider to be medium to high risk of non-repayment), according to a 2014 national representative study. Yet there is evidence that expanded access to credit can produce significant benefits for borrowers—from job retention to higher incomes.
To tackle this problem, we’ve partnered with kubo.financiero, the first regulated peer-to-peer online lending platform in Mexico. By creating a digital community connecting borrowers with investors, kubo cuts costs, increasing access to affordable loans in a country with some of the highest interest rates in Latin America. This is a boon for many people, but despite the flexibility in repayment schedules, many clients still make late payments over the course of their loans. In addition to paying late fees, these clients may be losing out on future opportunities for financial support, without even knowing it.
We spoke with clients to learn what causes them to pay late and uncovered a variety of different behavioral barriers that can get in the way. One key obstacle is the tendency to focus on the more salient consequences in the present, rather than those that may emerge later. While most were aware of the immediate costs like late fees and having to catch up on payments, almost no one mentioned the longer-term effects on their credit score and access to future loans. And people with an understanding of the future consequences may downplay them and instead prioritize other pressing issues like providing for their families.
Given the focus on the day-by-day finances, it’s not surprising that most clients don’t have concrete plans for how they’ll pay back their loans on time or get themselves back on track if they experience an unexpected financial shock. Many clients have goals, but rather than creating a set of clear steps they can take in the near term, most had broad strategies to boost their finances, such as “grow my business” or “work harder.”
It makes sense to focus on daily financial needs, of course. But because de-prioritizing loan payments can make it even harder to manage money later on, we want to help people stay on track in order to support their financial futures, too.
That’s why we will collaborate with kubo during the coming months to design interventions that address these obstacles in an effort to reduce late loan repayments. By harnessing insights about the context and client behavior—of which the above are just a sampling—we’ll be able to create solutions with the potential to strengthen credit scores and preserve access to future lines of credit when they need it.