MegaNews May 2025 – The Subprime Squeeze
How Consumer Lenders Can Thrive in a High-Delinquency World
The economic tides are shifting—and subprime lenders are feeling the squeeze. Inflation, resumed student loan repayments, and rising living costs have created a perfect storm for subprime borrowers. The result? Higher delinquencies, tighter margins, and more scrutiny from both regulators and investors.
But while some see storm clouds, others see opportunity.
This environment offers a chance to outmaneuver other players through agility, smarter underwriting, and tighter customer relationships.
Let’s explore ways to survive—and thrive—when delinquencies rise.
💡 1. Embrace Smarter, Not Just Stricter, Underwriting
Many lenders respond to rising delinquencies by tightening the credit box across the board. But blanket tightening can kill volume and alienate borrowers.
Tactical Moves:
- Leverage alternative data to refine borrower profiles beyond traditional credit scores.
- Adjust Debt-to-Income (DTI) thresholds downward to reflect economic uncertainty.
- Flag borderline approvals for human underwriting review — this allows for more nuanced decision-making.
- Consider fraud detection tools – Economic stress tends to increase fraud
💬 2. Reimagine Collections with Empathy and Tech
Collections are no longer just about calling 30/60/90 days in. Subprime borrowers often want to repay—but life gets in the way. Modern lenders win by being flexible, proactive, and digitally native.
Tactical Moves:
- Deploy SMS and email nudges before delinquency.
- Offer hardship flexibility
- Self-service payment options
🔄 3. Lean Into Relationship Lending
Big banks lend on models. Small lenders lend to people. In a high-delinquency world, knowing your borrower better than your competitors is a competitive advantage.
Tactical Moves:
- Assign account managers for higher-risk borrowers or repeat clients.
- Build loyalty programs that reward on-time payments with better terms.
- Follow up post-delinquency with a human check-in—not just a demand.
📊 4. Watch Your Data Like a Hawk
Now is the time to go deep on portfolio analytics. Identify early warning signs, segment loss curves, and set up feedback loops between collections and underwriting.
Tactical Moves:
- Monitor performance trends.
- Track “first sign of stress” metrics like grace period usage or payment method failures.
- Review manual overrides and correlate with downstream charge-offs.
📢 5. Be Proactive with Regulators (and Reputation)
Regulators are watching the subprime space closely. Getting ahead of the conversation can reduce risk and open doors.
Tactical Moves:
- Review marketing and collections materials for clarity and fairness.
- Prepare to explain your underwriting process and pricing strategy—transparency is your friend.
- Invest and participate in state and national finance associations to stay informed and involved.
Subprime lending has always been about managing risk under pressure. In 2025, that means moving fast, listening closely, and leveraging data and technology.
The squeeze is real—but so is the opportunity.