How You May Benefit from Additional Data When Reviewing Subprime Applicants

[Editor’s note: This is a blog post from Clarity Services. Clarity Services is a platinum sponsor at LendIt Fintech USA 2018, which will take place on April 9-11, 2018 in San Francisco.]

Nearly 80 million adults have what is considered subprime credit, according to Experian data.

Thankfully, in today’s lending industry, consumers with a score below prime have options for credit that would not have been available in the past.

Over time, lenders have come to understand that not all credit scores below prime are the same. Individuals with thin credit files, or those who have experienced a temporary financial setback, probably shouldn’t be lumped together with those who have consistently defaulted on loans.

That’s why a credit score alone isn’t enough to determine risk.

But how do you know? What criteria can lenders use to distinguish a good opportunity from an unreasonably risky loan? With the nonprime and subprime market continuing to expand, future revenue depends on answering these questions.

Alternative credit data is the sort of criteria that helps lenders consider more than an applicant’s score.

Two nonprime consumers – two very different risk profiles

Now, let’s examine two nonprime consumers with similar credit standings (seen in the same alternative credit bureau), who have a record of exhibiting substantially different credit behavior. In the alternative finance space, it’s important to distinguish relative profiles.

  • Nancy: Currently 34 years old, Nancy’s biweekly income averages $1,915 over a three-year period. One of her credit inquiries listed “unemployed” under occupation – but did not specify the length of her unemployment. Three and a half years ago, Nancy had a spotty job record, but she’s had her current job for a year and a half. She has had several credit inquiries from 15 different lenders over three and a half years. Despite many loans and being late on payments for two of them, she eventually paid each of them in full.
  • Darrell: Now 25, Darrell was 23 when Clarity first saw inquiries for him. While his income average has been higher than Nancy’s at $2,301, his biweekly income spread has been much larger (from $1,300 to $4,890). Darrell has had a job with his county government for a year and a half. From 2015 to 2016, he had many more tradelines than Nancy, three of which defaulted in 2016. After leaving the alternative credit market in 2017, he returned with more tradelines in 2018. Darrell has been suspected of loan stacking activity and has first payment defaults on his last three loans, all of which were charged off and entered into collections.

The takeaway: while Darrell has a higher biweekly income than Nancy, he is much less stable in his borrowing history. And, while Nancy has been late on a few payments, she has a proven track record of ultimately satisfying her debts.

These examples illustrate why lenders hoping to help consumers in the growing nonprime and subprime markets stand to benefit from alternative credit data.

Details make the difference

Many lenders understand that the subprime market is expanding, but still worry that lending to these consumers is too risky. A deeper understanding of the consumer’s credit history can help make lenders more comfortable. While the data may yield a cautionary tale for some, the added context will help lenders gain confidence in many others.

The juxtaposition of Nancy and Darrell is a good example of how alternative credit data helps lenders make more targeted decisions in the subprime market. Despite similar credit scores, the details behind Nancy’s history describe an applicant more lenders can trust. Despite Darrell’s higher biweekly income, his history of repayment and less stable lifestyle depict a much higher credit risk.

While the expanding subprime market is getting harder to ignore, additional alternative credit data can help distinguish between smart and risky investments.

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