Non-prime borrowers are becoming more educated on their options. If alternative financial services lenders want to retain their lower-risk consumers, they’ll need to offer the lower-cost loans these borrowers deserve.
Let’s start off with the basics. Risk-based pricing is fundamental in the alternative financial services (AFS) space. It’s simple: Lower-risk consumers will receive lower-cost loans and higher-risk consumers will receive higher-cost loans. But not offering consumers a lower-cost loan when their borrowing habits warrant it could go against you.
Lenders should keep in mind that the industry is starting to augment credit underwriting. Overlaying alternative credit data with traditional credit data allows lenders to know a lot more about consumers and their borrowing habits. That way, lenders can better assess risk and offer a lower-cost loan if deserved.
As a result, we’ve seen an overlap in consumers across AFS and traditional lenders—because if they can’t get the favorable rate they want from one, they have other options. Blended credit models that don’t just include traditional credit data allow consumers the chance to push additional information to lenders during evaluation. And in the end, lenders feel more comfortable lending to these non-prime consumers because of the additional data and a more precise analysis of risk.
So, what does the future hold? More than half of all online borrowers are new to the AFS credit space. But the population that’s being served by AFS lenders will get smaller, increasing the number of higher-risk consumers because lower-risk ones will have exited the pool. Consumers left in the AFS pool will end up paying higher rates because they will look even riskier than before. Plus, consumers won’t just head over to other AFS lenders—they might jump ship to traditional lenders too.
Think about this: 34% of 2017 AFS borrowers opened loans with traditional lenders in 2018, meaning 7% of 2017 borrowers overall switched to traditional lending in 2018.
The solution is simple: Build models that use alternative credit data. You’ll gain and retain more lower-risk consumers by offering a more favorable loan rate because the data backs it up. Plus, it allows you to gain access to more data on the non-prime consumer base. And once you understand the competition is trying to steal your lower-risk consumers by offering lower-cost loans, you’ll recognize the need to be proactive.
Now’s the time to take action. Offer your lower-risk consumers the rates they deserve before the competition does, and it will be easier to retain them. Consumers are starting to recognize the value in alternative financial services and that they can get evaluated differently. With more choices thanks to alternative credit data, consumers can seek out a lower rate among the competition.
