No lender wants to enter into a shaky alliance by giving out money to an applicant with poor track records. Still, no lender wants to let go of a chance to earn better revenues by lending money to an applicant either.
So, how does a lender assess a loan application when the applicant has no credit history whatsoever?
Introduction to Alternative Data
There are loan applicants that have no credit history at all, and then there are the ones who have a brief history of credit that appears stale due to consistent inactivity. Sometimes, even individuals with bad credit scores in the past can be in a better position to repay loans in the present due to improved financial standing. But NBFCs always face problems when it comes to assessing these individuals.
Alternative data is the data used by financial lenders to serve loans to borrowers with no credit history, who may have been rejected by traditional financial institutions like banks and credit unions. Most modern lenders today rely on the use of alternative data to assess a loan application. This data is deployed across the lending lifecycle to ensure steady returns on the loan disbursement.
Traditional Data v/s Alternative Data
Traditionally, all lenders rely on credit files maintained by various credit bureaus while making credit-disbursement decisions. These files adequately supply information regarding the performance of individuals while repaying the previous loans they might have raised.
However, traditional credit scoring data tends to be lopsided. The constraints of using traditional data for loan assessment leads to a wide demand-supply gap for loan products and its servicing. Most commonly, applicants lose out on opportunities to have loans sanctioned due to lack of credit histories that result from several reasons.
On the other hand, alternative data is the data that has initiated a significant shift in credit availability for unbanked and under-banked consumers. It is leveraged for a variety of purposes during the loan life cycle. Alternative data includes non-credit information about insurance payments, utility payments, rental payments, public records, and property records.
Sources of alternative data can be varied, like:
- An applicant’s payment history on items not included in a traditional credit report, such as rent and cell phone, utilities, or other bills.
- An applicant’s employment history can be used in credit scoring to assess the stability of a person’s financial situation.
- An applicant’s use and repayment of individual alternative loans
- An applicant’s bank account transaction data.
- An applicant’s data related non-financial behaviour such as educational background, occupation, and social media.
Uses of Alternative Data
In the highly competitive lending markets, lending institutions struggle to poach newly qualified borrowers and offer the most competitive terms for the loan. Non-traditional lending companies today believe that as a wide array of data falls outside credit scoring data that is deployed throughout the loan life cycle traditionally. This data is aptly called alternative data.
Using alternative data makes it easy to assess a loan application with no or insufficient credit history. Using various sources of alternative data, lenders can build for themselves a comprehensive view of a borrower’s financial behaviour. This knowledge can be a crucial component in the loan evaluation of an applicant.
Lenders use this data for functions ranging from marketing, account monitoring to the ones like loan disbursing and even collecting. Alternative data is of great help to lenders as it screens out fraud applicants and minimises losses to the lending business. Not only can alternative credit data provide predictive assistance where there is no historical data to assess a loan application, but it can also help identify risky propositions. Lending companies today use alternative data to increase the number of consumers they deal with.
Advantages of Using Alternative Data
Alternative data assesses the ability of customers to pay, their intent to pay and their financial stability. Here are some distinct advantages of using alternative data to determine loan application with no credit history:
1. Exploring Previously Uncharted Geographies
Using alternative credit scoring data can boost market penetration for a financial lending company while minimizing the risk of frauds. Loan applicant profiles like those of students, dependent spouses, retirees, immigrants and others who lack adequate credit history find it difficult to obtain loans from traditional loan agencies. With the use of alternative credit scoring data like bill payments patterns and expenditures, they can be sanctioned loans too.
2. Better Creditworthiness Assessment
Combining traditional data with alternative credit scoring data provides a wholesome view of an individual’s creditworthiness. With alternative credit scoring data, it is easier to estimate which applicants would be able to repay a loan with consistency. Assessing data like monthly bills, payment patterns and employment details helps lending firms make informed decisions.
3. Credit Access for the Under-banked
A large portion of the population remains unbanked or under-banked today. Lack of past credit records disqualifies them for traditional creditworthiness assessment when they apply for a loan. Using alternative data for loan evaluation provides this section of the population opportunities for securing a loan. Lending firms can extend responsible access to loan products for people who lack adequate background data.
4. Escalates The Underwriting Process
Lending firms can enhance the traditional method of underwriting with richer data points or variables resulting from alternative credit scoring. Variables like banking transaction behaviour, credit card repayment and overdue payment, promptness in paying monthly bills like telecom, utility, or cable bills, and employment history go a long way in escalating the underwriting process as it reflects mitigation of credit risk.
5. Makes Use Of Real-Time Data
While bad credit history impacts a borrower’s credit standing adversely for some time after the incident, alternative credit scoring uses real-time data. Lending companies can benefit from more time-relevant insights.
Here’s How You Assess a Loan Application with No Credit History!
Using alternative data from various sources allows a lending company to qualify a credit-invisible applicant for a loan. With alternative data, lenders get to earn high returns by onboarding a more significant number of customers. Loan application assessment with alternative credit scores promises immense convenience, speed, and simplicity, which a lending company could use.
As a lending company, you can garner a consumer’s data from their digital footprints, full-file public records, and banking accounts etc. You can ask an applicant with no credit history to furnish documents like account information from banks, credit cards, investments, and mobile phones at the time of application.
Use technology to assess various alternative factors like data around the payment history, bank balance, eCommerce shopping, travel size, and spending patterns of the loan seeker that apply. Leverage an applicant’s digital footprint like social media and mobile and internet usage to determine an applicant’s creditworthiness.
Assessing Loan Applications with No Credit History Seamlessly with Finezza
Finezza’s creatively designed analytics suite incorporates various perspectives for loan application assessment. The Saas platform does data sourcing following interactions and needs of different lending companies who decide to enjoy its vivid conveniences. The Finezza ecosystem uses both traditional and alternative sources of data to assess an individual’s creditworthiness. The platform analyses underlying financial transactions of the applicant and comes up with a unique and a practical index that reduces the probability of NPAs or credit going bad.
Once created, the loan assessment reports are made available to the specific Finezza user through the portal, email and also through interactive real-time chatbots incorporated into the system. Thus, users enjoy reports on the go / in real-time as per their particular requirement, all thanks to Finezza.
To know more about Finezza, get in touch with us!