MADISON, Wis. (8/7/14)--A new research paper from the Filene Research Institute explores the results of a lending program pilot that operates on the principles of rewards and encouragement for payment rather than punishment and pain for delinquency.
LIFT (Lower Interest for Timeliness), a program developed by Filene's i3 innovation team, is a simple loan feature that reduces loan interest rates when members make on-time payments. By giving borrowers a chance to earn their way to more affordable credit, LIFT is designed to help credit unions drive down delinquency, improve member satisfaction and gain confidence in lending to riskier borrowers.
With the assistance of a grant from the Center for Financial Services Innovation, Filene was able to build and test LIFT with five credit unions (data from one the credit unions was unusable) and more than 1,000 low- to moderate-income consumers with subprime credit scores. The LIFT feature was applied to automobile loans because credit unions generally generate high volumes of these types of loans and they are relatively easy to administer.
The LIFT incentive is an interest rate reduction of 25 basis points. Borrowers earned the rate reduction after every three consecutive on-time payments. Over the course of the study period, borrowers could earn a maximum of four rate reductions. The rate reduction did not change the monthly payment amount; instead, the extra payment was applied to the loan principal, thus shortening the life of the loan and reducing the total amount paid by the borrower.
Among the findings in the report:
"Overall, the LIFT pilot suggests that borrowers--even those with chronic payment problems--do respond to positive incentives for on-time payments," the report concluded. "Expanding borrower education and marketing about LIFT product payment incentive features could further increase on-time payments."
To download the report, use the link.