Embedded Payment Protection Insurance: Mitigating Loan Delinquencies, Protecting Members, and Strengthening CU Resilience

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In today’s continually challenging economic landscape, more credit unions are becoming acutely aware of the potential impacts—and fallout—that defaulting and delinquent borrowers pose. With the U.S. economy continuing to be affected by ongoing inflation, consumers' purchasing power has been reduced, putting pressure on household budgets, and making it challenging for borrowers to repay their consumer loans. With some rate relief likely on the way, previous rate hikes aimed at controlling inflation have still increased borrowing costs considerably, further exacerbating debt management problems for members.

Consequently, the debt-to-income ratio (DTI) is also rising across all demographics, especially among lower-income earners who must allocate a larger portion of their income toward existing debt payments. Larger households are particularly impacted, facing exponential increases in debt obligations, including credit card and auto loan balances.

The statistics are stark. Recent American debt reporting has revealed that younger generations are struggling with debt more than ever, especially credit card and auto loan debt, with delinquency rates now exceeding pre-pandemic levels.

According to data from Debt.org, in December 2023¹, the average non-mortgage debt across different age groups includes:

18ؘ–29-year-olds: $69 billion total, $12,871 average 

30–39-year-olds: $1.17 trillion, $26,532 average 

40–49-year-olds: $1.13 trillion $27,838 average 

50–59-year-olds: $98 billion, $23,719 average 

60–69-year-olds: $64 billion, $16,661 average 

70 and older: $36 billion $9,827 average¹ 

These numbers further underscore the financial struggles faced by so many of today’s consumers. Credit unions understand that their members seek loans out of necessity to cover unexpected expenses or make significant purchases like a vehicle or home. By gaining a deeper understanding of the underlying trends, demographic variations, and economic drivers affecting their members, credit unions could more effectively implement strategies to better mitigate risks and promote financial stability.

An increasing number of credit unions are adopting strategies like payment protection insurance to shield their members from vulnerabilities and unforeseen financial hardships, such as unexpected job loss or disability that could impact their ability to repay loans. The key lies in integrating this insurance seamlessly into the lending process itself—especially within the digital channels—without adding complexity or friction for members. This approach ensures payment protection insurance is seen as the valuable solution it truly is, one that aligns with members’ primary financial goals, helping to provide them with extra protection and peace of mind in an uncertain economy.

It's not only the members who benefit. An embedded payment protection insurance strategy also helps the credit union. Not only does it help mitigate risk for the institution’s loan portfolio, but it also enhances member experience. In an increasingly competitive lending market, offering insurance that protects members against default due to unforeseen circumstances enables credit unions to differentiate their services, expand their member base, and focus on building relationships. By showing genuine care and a clear dedication to members' financial well-being, credit unions can foster long-term loyalty and create new opportunities to grow accounts and drive revenue.

Credit unions understand the rippling impacts and effects of defaulting borrowers and the necessity for a robust loan delinquency risk mitigation strategy, one that seamlessly integrates prudent lending practices, proactive risk management, and comprehensive data aggregation. By addressing the needs of the institution and its members alike, an embedded payment protection insurance strategy may provide the financial security that supports members' primary financial goals while helping credit unions achieve their business objectives, ensuring a more sustainable and secure environment for everyone.

¹Debt.org, Demographics of Debt, December 2023

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