Personal loans are used by millions of people every year. During the application process, the lender evaluates the creditworthiness of the individual, and it’s paramountto have a FICO credit score. Approximately 26 million, the so-called “credit invisibles,” don’t have a credit score according to the Consumer Financial Protection Bureau. The second group of consumers, numbering 19 million, “the unscored,” have stale credit histories.

The unscored and the credit invisible can’t qualify for conventional loans. A new method of assessing the creditworthiness of applicants without using credit scores has emerged, though, and it involves using alternative data.

Characteristics of Personal Loans

Personal loans are unsecured and not backed by any collateral. If the individual defaults, the best cause of action the lender has is to sue the person, but they won’t face jail time. Lenders, therefore, take extra caution when giving out personal loans. All individuals who pass the credit evaluation and approval process share several traits, including good credit scores (600+), proof of stable income, trustworthiness, and a solid history of monthly loan payments.

Why do people apply for personal loans? There are many reasons including paying off credit card debt, medical bills, vacation expenses, home remodeling, moving costs, wedding costs, one-time expenses, rent expenses, etc. Personal loans are versatile, so it’s unfortunate not to qualify for one.

An alternative method of calculating creditworthiness

Credit invisibles and the unscored can’t prove their creditworthiness in the traditional sense of the word. However, in their day-to-day lives, they make money choices. Their present and past behavior might indicate good or bad financial discipline and their risk of defaulting.

New-age lenders, also known as, FinTech lenders are blazing the trail in their approach to lending by gathering and evaluating alternate data, which the traditional credit bureaus —Equifax, Experian, and TransUnion— have overlooked. These progressive lenders might consider:

  • Type of smartphone – with two distinct groups emerging, Android and iPhone users.
  • Online shopping history.
  • Geographic location, place of residence and other lifestyle factors.
  • Phone usage with the number of calls determining the extent of one’s network.
  • Frequency of changing phone numbers.
  • Social media posts.
  • Duration of stay in a particular residence.
  • Circle of friends.
  • College degree and area of study.
  • Career and job history.

These might seem like trivial data points, but the new-age lenders also check the individual’s relationship with bills. Recurring monthly expenses including cable TV, mobile, and rent payments, shed insight on the individual’s financial discipline.

Lenders also glean a lot of information from bank accounts. For instance, a study showed that people dubbed “good credit risks” have saving accounts. They also deposit enough money in their checking accounts. If they make large purchases, there is sufficient cash to stop checks from bouncing and prevent a negative balance that causesoverdraft fees. A person unlikely to pay a loan—a bad credit risk—might not have money in his or hersavings account, so the reasoning goes.

Up to 100 data points

 

New-age lenders value speed, as their customerbase is comprised of young people accustomed to the fast-paced online world of instant gratification. Unlike lenders working with fewer data points, these progressive companies must collect and analyze massive amounts of data quickly.

Artificial intelligence, machine learning, automation, and computer algorithms are used to speed up the evaluation process; the result is shorter approval times compared to traditional lenders like banks. The information used tends to be timely and relevant. For instance, rent arrears that have piled up for the last 6 months will probablytell the lender more about the applicant’s current financial situation than a loan they finished paying two months ago.

Concerns have been raised

The Consumer Financial Protection Bureau (CFPB) has maintained that alternative data might help the unscored and credit invisible access credit, but it has raised some concerns. The main boneofcontention as expressed by the former CFPB Director, Richard Cordray is, “how to minimize any risks in how this information is used.”

For instance, lenders are required to tell applicants the main reasons for rejecting their loan request. New-age lenders may use up to 100 parameters in their evaluation, so they might deny loans on the basis of race, ethnicity, religion, and gender.

Tips on improving your unconventional creditworthiness

Are you unscored or credit invisible? Progressive lenders will use your alternate data, so it’s essential to improve your unconventional creditworthiness. At the end of the day, you may also need advanced and expensive loans like a mortgage loan, so it’s vital to maintain a healthy credit score.

  1. Take out credit and pay on time

The easiest strategy to build credit is to obtain a starter credit card. Banks offer a line of credit as long as you have demonstrable income or assets, and you don’t have to be employed. Abide by the following rules: never exceed your credit limit, or max out your card, and pay off the full balance before the due date. You should build up credit using this simple way.

  1. Pay your bills on time

Paying bills on time might not affect your credit score, but it does wonders to your unconventional creditworthiness. However, long-overdue bills are dangerous. Usually, a company will seek the intervention of a collection agency, who might report you to credit bureaus, and the bills appear as negatives on your credit report.

  1. Get a co-signer

New-age fax less lenders may allow you to compensate for your low creditworthiness when you make a joint application with a co-signer. The person you choose should have bettercreditworthiness, a higher credit score, stable source of income, etc.

  1. Become money conscious

Strive to improve your financial discipline and learn more about money. It pays off in the long run, and you benefit bybecoming richer, happier, and less stressed about new financial obligations. You can start by setting financial goals like saving for your child’s college tuition. Learning from money gurus gives you a pathway to follow. Spending money on things you genuinely need, living within your means, and finding more ways to increase your income1, also go a long way.

 

Unconventional creditworthiness offers a radical shift in the approach lenders use to determine the person’s risk level. The future might be one, in which alternate data finds its way into conventional creditworthiness., just as, years ago,lenders began trusting credit scores because they were proven to work.

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