Using reminders to encourage repayment

Background

Payday loans are costly, not only because of the high interest rates they charge but also because they are designed to trap consumers in a cycle of debt. People who are unable to pay back a payday loan are offered a new loan. The Center for Responsible Lending finds that the majority of borrowers need multiple loans just to repay their first loan and a typical borrower may take as many as 10 loans per year.

Payday alternatives, like Credit Human’s QMoney, ensure that the loans are not cyclical – members cannot take out a second loan until they have paid off the first. However, whether or not such products are successful and beneficial alternatives to payday loans requires a repayment rate much higher than most payday loans. We continued our partnership with Credit Human Federal Credit Union to look at ways we might encourage more borrowers to repay their QMoney loan.

Key Insights

A lot of work has been put into understanding how we might encourage more people to successfully repay their debt. When we began to think about intervening to encourage higher repayment on QMoney loans, there were two findings that we felt were particularly relevant in this case.

• Most people do not think about when they will have money to make the next loan payment. Despite good intentions, many people fail to follow through on important plans such as taking medication, exercising, voting, and paying a loan on time. There is an increasing amount of evidence showing that prompting people to make specific plans in advance makes them more likely to follow through.

• People tend to anchor on deadlines and wait until the very end before making a payment. This behavior might make sense from a purely rational economic perspective, but from a behavioral perspective, members might be better served by making a partial payment when they have funds available. QMoney loans accrue daily interest, which adds up over time. If a member doesn’t pay off their loan when they have money, they may be tempted to spend it elsewhere.

Experiment

We launched an experiment aimed at increasing QMoney loan repayment rates. The 1017 members who took out a QMoney loan were randomly assigned to either the control or planning prompt conditions. We hypothesized that prompting the member to think and plan about their repayment in advance of the payment deadline would encourage more people to follow through on their intention to repay.

• A control condition where members received payment reminders 3 days before the 1st and 2nd-month payment due date as they would normally would.

• A planning prompt condition that included an additional email a few days after the loan was taken out prompted members to plan their payment in advance.

Results

During the test period, 1017 members took out QMoney loans. There was no statistically significant difference between conditions with regard to repayment. In both conditions, a surprising 90% of members successfully paid back their first loan.

However, the planning prompt email led people to pay back their first loan slightly sooner. Before both conditions received their usual reminder before the deadline, a significantly higher proportion of people had already paid back their loan in the group who received the planning prompt. This suggests that while people who were paying late didn’t switch to paying on time, people who were already paying on time ended up paying back their loan slightly sooner.

Not all members took just one loan, though. As soon as members pay off their QMoney loan, they are eligible to take out another one. Of the 1017 members who took out QMoney loans during the test period, 599 members took out multiple loans. Members who took out multiple loans were generally more likely to repay their loans sooner and much less likely to repay their loans after the due date or be charged off.

Overall, these results suggest that the planning prompts encouraged people to think about and plan their monthly finances. Given the high baseline repayment, the intervention likely is not strong enough to encourage greater repayment. As such, we are planning to replicate this work with loan types that have a lower baseline repayment and larger volumes.