How Lenders Can Identify Signs of Financial Distress in Borrowers

Ma-Keba Frye  |  February 18, 2021   |  Credit & Lending  


Since the onset of the pandemic, unemployment has reached a record high, leaving millions of Americans struggling to make ends meet. Today, at least 50 percent of American households in four of the country’s largest cities report serious financial problems ranging from depleted savings to late or missed payments. As lenders manage credit risk related to potential and current borrowers, they must watch out for signs of financial distress and be prepared to navigate them. 

At least 50% of American households in 4 of the country’s largest cities report serious financial problems, ranging from depleted savings to late or missed payments.

Increased overdraft activity 

Verifying income during the lending process can be very telling for lenders. Taking the time to assess bank statements and bank account activity for pre-approval can provide much needed insight into a borrower’s profile. Fortunately, lenders are well-trained to identify red flags during the underwriting process. When reviewing bank statements, consistent overdraft fees are a cause for concern. 

This specific sign displays a borrower’s inability to manage their finances and potentially indicates that they have a habit of spending more than they make. If a borrower shows a pattern of improperly handling their funds, it’s more likely that they won’t be able to pay back a loan, leaving lenders leery to approve the application.  

Partial and late payments

A borrower’s sudden inability to pay their bills on time or in full also signifies that they may be facing money woes. Partial payments can create a cycle that eventually leads to late payments. How borrowers manage their everyday expenses paints a picture of their overall financial standing and is indicative of their ability to make current and future credit and loan payments. 

Lenders need reassurance that borrowers are able to pay back their debts. Whether someone is a prospective or current customer, being able to understand the history of their other financial responsibilities related to utility, phone, loan, and credit card payments will help lenders make more informed decisions.  




Getting ahead of the problem

Post-pandemic delinquencies have been a major concern for lenders. During this time, lenders have to be proactive in their approach. Implementing credit monitoring solutions can help banks tackle issues head-on by monitoring ongoing data like utility, phone, rent, and streaming service payments. If lenders can identify the first signs of a borrower’s inability to pay everyday expenses on time or in full, they can expect and prepare for late or incomplete credit card and loan payments. 

Implementing credit monitoring solutions can help banks tackle issues head on by monitoring ongoing data like utility, phone, rent, and streaming service payments.

To get ahead of the problem, banks and lenders can also reach out to their customers and offer solutions like forbearance, reduced rates, or short-term payment plans to support them during this troubling time. Not only does this help the borrower keep their head above water, but it also builds a positive, long-term customer relationship.

Identify signs of financial distress with consent-based data

The proof of mounting debt normally hits the necessities in a customer’s life first. Using monthly utility and rental payments to identify signs of financial distress can save lenders time and money. Using consent-based channels to monitor this data will ensure that lenders receive the most recent information, as well as maintaining data privacy for customers. 

During these critical times, gaining in-depth insights into borrower behavior is more important than ever before. Incorporating solutions like Urjanet’s alternative data into the credit monitoring process can alert you to signs of financial distress in current borrowers before they worsen, and also potentially weed out prospective borrowers that pose a significant risk. 

If you’re ready to get back to lending confidently, speak with one of our experts today to learn how to incorporate everyday expenses into your credit decisioning.

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About Ma-Keba Frye

Ma-Keba Frye is a Content Marketing Associate at Urjanet, assisting with content development and execution. When she's not writing, she enjoys reading, listening to music, and volunteering.

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