Before we get into this debate, let’s talk about what first payment default means?
In the broadest sense, first payment default is when someone take out a loan, a line of credit or a credit card and fails to make their very first payment.
Now, why on God’s green earth would someone do that? Wouldn’t they ruin their credit and get a bunch of collections agencies chasing after them? Well, to answer that, we need to think like someone that, doesn’t give a sh*t about their credit. Or worse, an identity thief that tries to take out loans or credit pretending to be someone else.
However, there are those that genuinely forgot to make their first payment. It could really be an honest mistake.
For instance, someone might be traveling and out of the country, completely missed their statement. Or someone recently moved and forgot to change their address with their creditor. Or some simply didn’t have the funds to cover their payment and will eventually call in or log on to make their payment.
If we drill deeper and further define first payment default, we could also call this situation first payment failure (if someone truly missed their payment unintentionally).
Now, let’s be honest, if someone failed to make their first payment, the chances of you recover any money is near zero. However, there’s another 5–10% of first payment defaulters are in fact manage to make a recovery and keep their financial obligations in tact.
Let’s get back to the point of our discussion. Does first payment default really matter? Well, that still depends.
If you are running a full fledge online lending portfolio, you will live and die by this metric. If your first payment default is high (this is all relative to the type of portfolio you are running, prime, near prime, subprime, no prime that sort of thing) then you are a dead peckerwood. Why? Most likely you are drawing repayments with an automatic repayment arrangements. If you are attempting that payment and there is nothing there in the bank account, your second and third attempt is most likely a giant waste of time.
However, if you are running a brick and mortar stores and you rely on folks to come into your branch to drop off checks and cash, then that is an entirely different matter. People are busy and they don’t remember to show up before, during or after work to drop off their checks. Sometimes, ney, most of the time, they miss their due date and your report needs to allow 7 days to let them come by the branch and conduct business.
In summary, first payment default is important and also interesting depending on what type of an outfit you are running.
Maybe we will discuss how to control for first payment default next time.
Spoiler alert, it’s a combination of technology and statistics.