Jul 25 2014

Lower Interest for Timeliness (LIFT) Pilot: Final Report

Report  
Number  
335

Lenders have always relied on financial punishment and penalties to ensure borrowers repay their loans on time. Rarely do we ever see borrowers being rewarded for responsible and timely repayment. In 2011 an i³ group sought to explore this issue. The result was LIFT: a product concept designed to lower interest rates for borrowers as they make timely payments. 

J. Michael Collins
Faculty Director
Center for Financial Security, University of Wisconsin-Madison
Justin Sydnor
Assistant Professor
School of Business, University of Wisconsin-Madison
Leah Gjertson
PhD Candidate
School of Social Work, University of Wisconsin-Madison
Report Number 335

Executive Summary

LIFT (Lower Interest for Timeliness) 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 could help credit unions drive down delinquency, improve member satisfaction, and gain confidence in lending to riskier borrowers. The LIFT pilot suggests that borrowers—even those with chronic payment problems— do respond to positive incentives for on-time payments. Expanding borrower education and marketing about LIFT product payment incentive features could further increase on-time payments.

What is the research about?

Thanks to a generous grant from the Center for Financial Services Innovation, Filene was able to build and test LIFT with five credit unions and over 1,000 low- to moderate-income consumers with subprime credit scores. LIFT was applied to automobile loans since credit unions generate high volumes of these types of loans. As part of the market test, the LIFT feature rewarded consumers who made three consecutive on-time payments with a 25-basis-point loan pricing reduction. Within the report, a team of researchers from the University of Wisconsin-Madison present detailed insights and results from this market pilot.

The researchers conclude that the LIFT pilot proves borrowers do respond to positive incentives for on-time payments. The report also highlights the impact LIFT had on late fees, late-payments, and defaults. Filene would like to share these insights with your credit union as you continue to build programs and services that will satisfy your members' needs.

What are the credit union implications?

Overall, the researchers conclude, the “LIFT pilot suggests that borrowers—even those with chronic payment problems—do respond to positive incentives for on-time payments. Expanding borrower education and marketing about LIFT product payment incentive features could further increase on-time payments.” Breaking this conclusion into more specific findings, the researchers discover the following:

  • Late payments: At three of the four participating credit union sites, LIFT borrowers had lower rates of ever making a late payment. The difference in the number of late payments between the LIFT and non-LIFT groups was statistically significant at two of the sites.
  • Default: The rate of borrowers missing two consecutive payments was slightly lower among the LIFT borrowers at all sites, but none of the differences were statistically significant.
  • Late fees: There were no measurable differences between the LIFT and non-LIFT groups in total dollar amount of late fees assessed.
  • Perceptions of credit union: LIFT borrowers had stronger positive attitudes toward their lender, even controlling for loan terms, total fees, and penalties.
  • Awareness: A survey of borrowers indicated that less than half (approximately 40%) of borrowers who had LIFT loans were aware of the LIFT interest rate incentive, suggesting that the effects reported in this pilot may be improved with a more effective marketing approach.

This report is sponsored by the Financial Capability Innovation Fund contributors Citi Foundation and Bank of America, Capital One, Morgan Stanley, Experian, VISA, and U.S. Bank.