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American debt isn’t just growing, it’s becoming harder to manage. And the numbers paint a sobering picture.
In this blog, we’ll share data about consumers’ financial struggles, how debt optimization can lead to more affordable outcomes for your borrowers, and show how MeridianLink is helping our customers achieve these results.
The state of consumer debt
According to the Federal Reserve, the debt payment-to-income (DTI) ratio reached 11.3% in Q3 2024, meaning households are devoting over one-tenth of their income just to stay afloat with debt payments. And that includes everything from mortgages and auto loans to mounting credit card balances.
Here’s the breakdown:
- Total household debt: $18.036 trillion
- Mortgage debt: $13 trillion ~72% of the above-mentioned ~$18 trillion
- Auto loan debt: Late car payments are at the highest rate since 1994.
- Credit card debt: Record highs, with default rates reaching levels not seen since 2010.
- Even within the mortgage market, the pressure is mounting. FHA loan delinquencies now sit at 11.03%, even though the broader mortgage market remains relatively stable.
With financial strain intensifying, consumers need help regaining control of their debt. That’s where debt optimization comes in.
What is debt optimization, and why does it matter now?
Debt optimization is a strategic approach to improving consumers’ credit health while reducing risk for financial institutions. It could involve adjusting repayment terms, consolidating high-interest debt, or restructuring loans to make debt more manageable.
For borrowers, this can improve their financial situation and help them qualify for better loan products or rates they might not have access to otherwise. For your financial institution, debt optimization is an effective tool for mitigating risk and improving loan performance.
When done right, it can:
- Restructure debt obligations to make payments more manageable, reducing the risk of delinquency.
- Enhance credit profiles, helping borrowers qualify for better loans and interest rates.
- Lower default rates by aligning repayment terms with the borrower’s current financial reality.
In today’s economic climate, debt optimization is more critical than ever. Rising delinquency rates and financial strain mean more consumers are struggling to meet obligations. However, your financial institution has access to data-driven tools that allow for tailored debt optimization strategies, improving outcomes for both you and the borrower.
Here’s what debt optimization done right looks like…
Madison, a first-time homebuyer, has spent years saving for a down payment. She’s finally ready and submits a mortgage application. On paper, things look promising, she has a steady income and decent credit. But there’s a snag: her DTI ratio is too high, largely due to a $700/month car payment and several credit card balances.
Under normal circumstances, her loan options would be limited or come with punitive interest rates. But thanks to MeridianLink’s Debt Optimization technology, her lender sees a different path.
Rather than simply denying the loan or forcing Madison into a higher-risk product, the loan officer taps into the product and pricing engine integrated with both mortgage and consumer lending platforms.
How does MeridianLink make this possible?
MeridianLink® Mortgage includes an integrated, patented, debt optimization tool that enables you to:
- Run scenarios based on Madison’s complete financial profile
- Explore opportunities to refinance her auto loan at a lower monthly payment
- Consolidate credit card debt into a structured personal loan
With these changes, Madison’s monthly obligations shrink, her DTI falls within acceptable limits, and suddenly, she qualifies for a competitively priced mortgage. She may even eliminate the need for mortgage insurance (MI) and find herself able to afford more home than she originally thought possible.
That’s not just a win for Madison. It’s a win for your institution, too. In fact, the benefits are threefold:
- Expanded eligibility: Borrowers who were once disqualified can now meet underwriting criteria, without compromising credit quality.
- Cross-selling opportunities: You can easily identify opportunities where auto refinancing, personal loans, or credit card consolidation would be beneficial, creating a deeper relationship with the borrower.
- Advisor positioning: Instead of being a gatekeeper, your institution becomes a financial consultant, helping borrowers find the best path forward rather than just processing applications.
Help your borrowers (and your business) thrive.
Delinquency risk is rising, especially with auto and credit card debt, putting pressure on both consumers and lenders. Many households are already stretched thin, and as financial stress builds, borrowers are becoming more cautious and selective about who they trust with their money.
Debt optimization allows you to move beyond binary decisions to smarter, more personalized financial solutions that build trust, strengthen relationships, and deliver impactful outcomes in today’s challenging lending environment. Digital platforms like MeridianLink are stepping up to meet this need, empowering lenders like you to make faster, more informed, and tailored decisions that drive better results for your borrowers and your business.
MeridianLink can help you guide borrowers like Madison from financial stress to financial success.
