Providing a better safety net for digital lenders and their borrowers
Digital lending is revolutionizing the financial landscape, offering convenience and accessibility to borrowers. The simple process of answering a few questions and receiving an immediate response has changed how borrowers get loans. Because this process is so successful, lenders pause at the thought of making changes for fear of losing that simplicity or of turning away potential borrowers.
An opportunity to improve the business model
However, there are opportunities to improve the digital lending business model by adding payment protection to the lending experience. Payment protection reduces or pays the loan balance should a borrower become involuntarily unemployed, disabled or die. This allows the lender to receive monthly payments or the loan paid in full without fear of the borrower paying late or defaulting, protecting both the lender and the borrower.
Earlier this year, Securian Financial conducted in-depth interviews with digital lenders to ask what they thought about payment protection and found there are misconceptions about this product, so let’s set the record straight.
Common misconceptions about payment protection
1. It’s not a product borrowers know
Payment protection may not be a household name; however, borrowers have seen this product before. Anyone booking a flight has been asked, “Do you want to protect your flight?” Buying payment protection is similar, except to ask, “Do you want to protect your loan?”
2. These products aren’t profitable
Payment protection is profitable in two ways:
- Adding this solution allows digital lenders to generate non-interest income, thus earning money on each sale of payment protection.
- Should your borrower face involuntary unemployment, disability or death, you will receive all or part of the loan instead of dealing with delinquency or default.
3. Payment protection would add cost
Cost is a significant factor for borrowers. We consider that when pricing the product and have options that add a marginal increase that won’t impact their monthly budget or debt ratio calculations. Payment protection can provide a financial safety net when your borrowers might need it the most.
4. Our company already has a hardship program
Many digital lenders have some sort of hardship program, whether it’s loan deferments, skip payments or payment holidays. In the end, however, the borrower may face a financial challenge they can’t overcome. They are now delinquent or in default and the lender is out the money – a bad situation for both parties. Without payment protection, the risk is assumed by the digital lender.
With payment protection, both the lender and the borrower are covered should something major happen to the borrower, such as involuntary unemployment, disability or death. Payment protection would reduce or pay off the outstanding loan balance in these instances. With payment protection, the risk is assumed by the insurance carrier.
5. It’s a risky product
Actually, payment protection is about removing risk for you and your borrower. Because payment protection pays you all or part of the loan should your borrower become involuntary unemployed, disabled or die, you reduce the risk of that loan.
Other areas of risk to consider are relevant regulations and industry standards. Choose an insurance carrier that is recognized for high regulatory standards and is an expert in payment protection solutions. This will help protect you and your borrowers’ investments.
Enhance your bottom line
Payment protection helps support a borrower’s financial well-being, reduce defaults, and generate non-interest income to enhance your bottom line. Securian Financial’s high financial strength ratings and decades of experience offering payment protection solutions means you are receiving solutions and expertise that pays for you and your borrowers.
