Alternative Credit Data: The crystal ball to detect the intent to not pay consumer before you approve the loan.
Underwriting a subprime consumer loan can feel like trying to see the future. Lenders need the right tools to help bring that future into better focus. While lenders navigate the process, they must also balance risk mitigation with revenue generation.
Preventing early payment default for subprime borrowers requires a different type of underwriting because their motives and credit history can vary. Some lenders think their job is done once they determine ability to pay. In the subprime market, it is imperative to also determine intent to repay. Alternative credit data is the most effective tool to decipher intent and help prevent early payment default.
How Can You Discern a Subprime Consumer’s Intent Using Alternative Credit Data
One of the most predictive factors to determine intent to repay is a consumer’s stability, both personally and financially. Frequent changes to address or income, and/or spikes in recent credit inquiries, can all be red flags.
Alternative credit bureaus can offer the visibility lenders need into these attributes as well as stability metrics over time. Credit bureaus that specialize in subprime data can also provide a cross-industry view of financial behavior, including online, storefront, payday, and installment loans.
When a consumer takes out loans with no intention of paying them back, they are committing fraud. Applicants with little stability and a lot of credit inquiries could be looking to acquire as much money as possible before vanishing. Lenders need to spot them early to avoid being the next default.
Early Payment Default Can Happen Anytime
Historically, storefront lending is a relationship-driven business. Lenders have the ability to do identity verification on the spot. It has been a common practice for most lenders to approve the majority of applicants walking through their doors. Losses due to defaults are built into the pricing structure, but most recently, storefront owners have become more concerned about the consumer with a deep subprime score.
Nearly 29 million consumers in the U.S. have credit scores between 300-549.
Storefront lenders became more vigilant when underwriting this particular consumer after seeing an increase in defaults. Even once a relationship develops with a repeat customer, the lender cannot afford to relax its underwriting approach; complacency can be a costly mistake.
Lenders should take the time to check in on the recent financial behavior of that customer each time they return for a loan. After all, 28 percent of the customers who switch lenders will default on the previous loan. Has your customer been borrowing from another lender? Is that customer one loan away from default?
Lenders need insight into their applicants’ current financial position, including the consumer’s recent credit inquiries and tradelines so they have a better understanding of where they fit into the consumer’s larger picture.
Alternative Credit Data is Your Defense
Lenders must take the first step to try to identify and eliminate intent to not pay consumers before they grant the loan. Alternative credit data is the key to preventing early payment default, and Clarity Services has more of this data than any other alternative credit bureau. A few extra minutes during underwriting can save thousands in default!
