TransUnion Study Offers New Insight on Alternative Lending Borrowers
Inside Subprime: May 25, 2018
By Aubrey Sitler
Traditionally, many traditional lenders have assumed that people who pursue alternative loan products are too risky to lend to using traditional credit products. However, Chicago-based credit union TransUnion recently published a study that provides insight into lending risk and a specific segment of the population that takes part in the subprime loan market: people who also participate in the traditional credit market.
Why is this important? It provides some evidence that people who take out, for instance, a payday loan are not all inherently too risky to lend to with traditional loan products, such as credit cards or auto loans. This should ultimately help folks in need of further credit or loan assistance. As Liz Pagel, co-author of the study and vice president in TransUnion’s financial services business unit, points out: “This is a great financial inclusion story, as the study identifies various metrics that can help lenders differentiate higher risk consumers from lower risk using alternative loan data, and thereby extend credit where they may not have previously.”
Here are the study details: To start, it’s important to know that about 66% of the people who participate in the alternative loan market (i.e., people who take out short-term loans including payday loans, short-term installment loans, virtual rent-to-ownand auto title loans) fall into the subprime risk category. That is, they are the riskiest people to lend to across all credit tiers, as indicated by their VantageScore 3.0 credit score of 300 to 600. But the question is: does that mean that all people who pursue alternative loans are automatically too risky of an investment for other types of lenders to even consider?
To conduct this study, TransUnion used data on over 5 million consumers, all of whom utilized a new traditional credit product between the 2nd quarter of 2015 and the 1st quarter of 2016. Then, they studied how well those consumers adhered to their loan requirements over the next 12 months. They found that about 450,000 (8%) of those studied were also alternative loan borrowers in the TransUnion alternative loan database, so they compared the loan performance of those folks with that of the rest of the traditional credit product consumers who were not also alternative loan borrowers.
In the end, a major finding from the study is that while many alternative loan borrowers are higher-risk on these traditional loan products (that is, maybe they defaulted on their loans or made late payments that caused them to be considered high risk), there were also many people in this same subpopulation who were likely to be successful as, for example, auto loan or credit card borrowers.
These findings are significant for lenders who historically have not been able to segment out the potential customers they should be targeting due to their presumption that someone’s presence in the alternative loan database is enough to qualify them as high-risk, rather than analyzing details about what identifies someone’s potential to be a good, low-risk borrowers. According to Pagel: “Lenders can use additional attributes available in the alternative lending database, such as number of zip codes, velocity of inquiries, the number of short-term loans, and various other characteristics, to further assess risk. For example, consumers who had numerous address changes on file or were associated with a high number of cell phone numbers were also more likely to be delinquent on traditional credit products. Taking note of these potential “high-risk” indicators and incorporating additional data points can help separate that risk. This provides an opportunity to go above and beyond just knowing if a specific consumer is present in the alternative lending database and provides a more comprehensive understanding of consumer behavior.”
For more details on TransUnion’s study findings, you can read the official TransUnion press release here.