In the wake of COVID-19, local councils and housing providers have been jolted into finding new ways of delivering services and interacting with their tenants – especially when it comes to income collection and rent arrears. Increasingly, we’re seeing providers employ innovative strategies while moving from debt recovery to support provision.
Behavioural insights tell us that individuals tend to focus on three areas when it comes to repayment arrangements:
1. Number of debts
2. Instalment values
3. Repayment duration
By applying behavioural insights to each of the above, housing providers can establish and nurture more sustainable arrangements.
1. Number of debts
How many debts we have and their interest rates have important implications on our repayment decisions. Rationally, we should pay the minimum amount required to avoid charges on each debt, focusing any additional funds on the debt with the highest interest rate. Instead, we tend to be more motivated towards paying off the debt with the smallest starting amount. This concentrated strategy prompts faster repayment of that particular debt, to the detriment of other debts. For this reason, where appropriate, it is worth having a discussion with tenants about the number of debts they are managing. Only after considering a tenant’s situation in full will arrears teams have an appreciation of what instalment value a tenant will be able to maintain.
2. Instalment value anchoring
Providers need to consider how they frame the choice they give to tenants in relation to the instalment value. Due to a cognitive bias called ‘anchoring’, individuals rely too heavily on initial pieces of information or numbers when making subsequent decisions. The first instalment value we suggest should provide tenants with an automatic indication of roughly how much they should pay, and research has shown that this in fact reduces repayment amounts. Given the power of anchors to reduce repayment amounts, it is crucial that the arrears team is able to make the first suggestion of an affordable amount.
3. Payment duration
The length that tenants have to make repayments is a crucial consideration in any arrangement. Usually individuals want to reduce their repayment duration and will factor in the affordability of increased instalment repayments if it enables shorter repayment periods. However, given the flexible nature of arrangements, the long-term consequences of their decisions are often unclear. Basing an arrangement on a timeframe is a useful way to avoid low anchors and provides the tenant with a clear understanding of how long this process will continue for. By taking into consideration the number of debts a tenant has, their instalment value and their payment duration, landlords can start to build a process geared towards optimised, sustainable arrangements.
Maintaining the arrangement commitment
Establishing behavioural-based interventions will help to optimise the arrangement process as well as helping to nurture the landlord-tenant relationship.