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Lending Virtually: Why the Borrower Experience Matters

September 2, 2020
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Effective loan application processes help financial institutions capitalize on a greater share of opportunities for new earning assets. More refined pricing models mitigate risk, faster decisioning lowers costs and discovery of potential product sales contributes to the bottom line.

But banks and credit unions also need to be cognizant of the customer or member experience because it reflects on their brand. As we examined in our 2019 Lending Insights baseline report, recent innovations such as Apple Card and lines of credit that can be converted into fixed-term loans are changing consumer expectations.

In our Raddon Research Insights study, Borrowing From Experience: Building a Better Loan Process, we view the application process through the lens of the borrower by asking about their experience when they applied for their most recent loan. Their perspective shows points of friction within the process, provides a measure of satisfaction across products and channels, and helps financial institutions hone their processes to resonate with today’s borrowers.

The Grade Is in: Satisfactory but Needs Improvement

Overall, borrowers were generally satisfied with their loan application experience. On a 10-point scale from Extremely Difficult (1) to Extremely Easy (10), borrowers rated the process a 7.4. However, consumers ages 18-34 who are in their prime borrowing years rated the ease of process lower at 7.2. (Figure 1)

This is notable because these consumers were more likely than their older peers to have most recently applied for a credit card, auto loan or personal loan, which normally entails simpler processes. Older consumers had a higher tendency to have most recently applied for a home mortgage loan, where the process is more complex. Younger consumers (48 percent) were also more likely than all borrowers (37 percent) to agree or strongly agree with the statement, “Getting a loan is a long and difficult process.” (Figure 2)

These findings point to an emerging disconnect between traditional lenders and modern borrowers. Processes that may have been acceptable to older generations are proving substandard for younger borrowers who hold a different set of expectations.

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Make Lending Personal

One area where lenders have opportunity to improve the borrower application experience is the personal loan process. Borrowers who most recently applied for a personal loan rated the ease of process a 7.4. This rated as more difficult than those who had most recently applied for an auto loan (7.9), home equity loan or line of credit (7.8) or credit card (7.9). It rated easier than the application process for a home mortgage (7.1) (Figure 3).

Personal loan applicants were also the most likely to abandon the process and return to complete it later. One in 10 borrowers (10 percent) who most recently applied for a personal loan suspended the process, twice the rate of applicants across all loan types (5 percent) (Figure 4). More stringent underwriting standards for these riskier loans, as well as the applicant being unprepared with the required information, are likely factors behind this more challenging experience. This shows a need for lenders to improve their education and data gathering efforts and leverage technology to accelerate pricing and approval decisions for personal loans.

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Elevate Your Brand

The relative difficulty of the personal loan process is particularly meaningful amid the current pandemic. With the mass market of consumers being most broadly affected by the economic impact caused by business shutdowns, lenders with capabilities to efficiently disperse small-dollar loans would be well-equipped to help their markets and communities navigate these turbulent times.

Coming out of the financial crisis of 2008-2009, several Raddon clients had success reinvigorating their loan franchise by developing small-dollar loan programs. Existing customers or members who were otherwise in good standing but may have faced short-term cash flow problems were afforded fast, easy access to funds.

Beyond providing a valuable service, these programs elevated the perception of the institutions’ brand around lending. Borrowers who took out these loans were appreciative of the simple access to a modest but meaningful amount of money, and word of their experience resonated within our clients’ marketplaces.

Financial crises aside, individual households may periodically encounter hardships where a trusted financial partner should be equipped to assist. As part of a well-diversified loan portfolio, a faster personal loan process with more sophisticated pricing controls can be a profitable offering that fills an apparent gap in the marketplace.

In turn, lenders should consider what an effective personal loan program might entail today and in the future. Do you offer a mobile-based loan program for existing accountholders that allows for quick, easy access to a small amount of money? Can you use existing credit card lines to extend moderately priced, fixed-term loans to customers or members in need of temporary assistance?

While product features and a capable staff are no less important today than before, the borrower’s application experience is increasingly vital to a lender’s success. Building a better loan process not only helps drive greater loan volume, it also builds your brand.