Most Americans are in debt — total consumer debt reached $14.6 trillion last year, and is only growing. The average person has $90,460 in consumer debt, mostly comprised of their mortgage and student loans.

One way to reduce the debt burden is through refinance and balance transfers, which replaces existing debt with a new debt that contains more favorable conditions, like a lower interest rate. However, both the refinance and balance transfer systems are archaic and complicated. Refinancing unsecured credit involves a checks-based process, while secured credit refinance requires factors like title transfers, which can add an additional layer of complexity to the process.

In an increasingly fragmented and highly-saturated debt market, the solution is surprisingly simple, via a standardized API that can retrieve a debt, access payoff amounts and make disbursements to that debt, all in one place.

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Current state of the refinance industry

Current economic conditions are raising concerns that loan delinquencies may rise — and since direct loan disbursements already come with increased risk and default rates, that’s the last thing lenders want. Here are three factors affecting the refinance landscape today: 

• Rising interest rates and high home prices means a rising mortgage default rate — the expected rate of loan delinquency of 180 days or more increased to 2.78%. The high share of cash-out refinances is driving a rise in underwriting risk, and with it delinquencies. 
• The student loan pause is scheduled to end at the end of 2022, leaving millions of borrowers to face paying back their loans. Though Biden has passed a student-loan relief package for borrowers with federal student loans, it doesn’t apply to private student loans, which are often offered by banks and refinanced by fintechs such as SoFi. The end of the pause can help these fintechs, as borrowers will have an incentive to refinance their active loans.

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A deeper look at consumer loans

Inflation is especially damaging for credit card holders — as prices go up, credit card balances rise. Credit card interest rates are also rising, making the debt borrowers are taking on more expensive. Total credit card balances rose 13% in the second half of 2021, and the average interest rate for a new credit card rose to 21.4%. This is at a time when the number of consumers with credit cards and personal loans is at an all-time high. Credit card companies aren’t required to disclose if they’re raising interest rates, which may leave consumers with an unhappy surprise in their next billing cycle.

The average American has $5,220 in credit card debt. Many carry a balance on their card from month to month. Only 44% of credit card users pay off their full balance each month.

While there are both consumer and government interventions to slow the pace of the ballooning debt crisis, there’s opportunity for fintechs and financial services companies to lean in and embrace solutions to support borrowers —  especially as lenders continue to expand access to credit.

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Evaluating Fintech’s Approach to Lending

The future of lending is digital and streamlined — and many fintechs have capitalized on this trend, expanding quickly thanks to data algorithms and artificial intelligence. This enables lenders to better access a borrower’s creditworthiness and reach historically under-served populations. They can offer personalized products to a wider audience and better serve customer needs. 

For example, companies like Upstart utilize factors beyond credit score to offer competitive personal loans and small business loans, via artificial intelligence. Fintech company Clutch works with local credit unions to refinance their auto loans and perform credit card balance transfers. 

• Mortgages: Many larger banks, including Goldman Sachs, Citi, and JPMorgan, are investing in these fintech startups that can help them stay competitive in the mortgage refinance market, including reaching new markets and improving their efficiency. Some reports found that fintech lenders process mortgage applications 20% faster than other lenders. Other research found that fintechs are better equipped to reach out to marginalized consumers over traditional banks — specifically those who have been denied credit in the past. 
• Student Loans: While these larger banks help users refinance their mortgage, many don’t refinance student loans, typically because of strict regulations and a limited market. Many fintechs have filled in the gaps left by these larger institutions.
• Consumer Loans: One of the biggest areas of expansion for fintechs is in consumer credit, specifically unsecured personal installment loans, which are typically used for paying off credit card balances, debt consolidation, or large household purchases. Research found that fintechs are able to reach lower-score consumers, specifically those who have experienced a bankruptcy or a recent credit denial — making these products more accessible at large. 

For borrowers who have many different types of debt, it can be difficult to keep track of their debts and refinance options across many different lenders, especially if some lenders don’t offer the option to refinance certain types of debt. Consumers are hungry for a digital refinance experience that replaces the current process — known for being slow, manual, labor intensive, and fragmented.

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About Debt APIs

Borrowers are looking for easy ways to pay off their debt, and financial services companies are looking for ways to enhance their existing debt solutions and integrate new, improved tools into their services. Debt APIs can serve both.

Debt APIs aid both debt refinance and debt repayment — allowing financial companies to offer better products and services and helping users pay or refinance their debt more easily. Debt solutions like Method’s deliver real-time data about the borrower’s debt and can help reveal ways to improve or refinance their debt. 

Onboarding a customer can be a tedious process, specifically due to all the documents and data needed to analyze a user’s financial debt situation. Through debt APIs, it’s possible to onboard customers in just minutes. Lenders can easily retrieve their customer’s financial data thanks to open banking solutions, which additionally reduce fraud and document falsifications.

By offering faster and more personalized refinancing alternatives, debt APIs can reduce the time it takes for a user to successfully refinance their debt.

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Method’s Solution

Method builds APIs that allow lenders to lower their lending risk and increase revenue by engaging directly with their users’ debts.

Method Data allows companies to retrieve real-time data on all debt accounts, including refinance and debt consolidation across many different types of debt, including student loans, personal, credit card, auto, mortgage, and other loans — using just a user’s phone number. To date, we’ve processed 25,000 refinancing transactions for an average credit amount of $500 per credit line. Lenders can access live payoff amounts, balances, dates, details, and interest rates of debts, all in one place. They can also move funds over via balance transfer or disbursements electronically. Method Payments allows companies to initiate disbursements to any type of debt with just one click, decreasing default risk and improving overall user experience. 

While the benefits of automated payments are clear when it comes to debt, it’s important to find the right partner to embark on the journey with. Let Method help — schedule some time here to learn more or reach out to team@methodfi.com.