Alternative loan vs traditional loan: loyalty and fluidity
Non-senior loans have revolutionized the lending industry. In an age when people don’t have a stable credit history, getting a traditional loan isn’t easy – and non-prime has become a go-to option in such scenarios. In recent years, alternative financial services have gained momentum in terms of acceptability and volume. There are various companies in the market that offer instant loans even to borrowers who have poor credit history. But how can we infer how many people have migrated to unprivileged online borrowing from the traditional borrowing setup, and how many people have reverted to the traditional setup?
Experian Clarity Services, a credit reporting agency specializing in close to prime and subprime consumers, offers credit data to Alternative Financial Service Providers (AFS). This helps lenders get a broader perspective of non-principal applicants and additionally allows them to make more informed decisions.
The company provides the AFS Trend Report which specifies the prevailing trends and consumer behavior in the market by studying the underlying factors. In the 2019 AFS Loan Trends Report, Clarity studied a sample of 350 million consumer loan applications and over 25 million installment loans to assess market trends for the period 2014-2018. Clarity also used data from Experian’s national credit bureau to analyze consumer behavior.
Alternative Financial Services – What Are Market Trends Saying?
Unprivileged consumers include people who may have been irresponsible with credit before, young people with an inadequate credit history, people facing sudden and unforeseen emergencies, recent immigrants to the United States, or someone in immediate need. of cash. The basis of the report includes loan origination factors (involves online and storefront channels) and loan types (includes installments and one-time payment).
In order to study the rise of the online loan market from 2014 to 2018, Clarity studied both online and single payment installment loans based on the number of loans issued and the total dollar amount funded.
The graphs illustrate how online installment loans grew steadily from 2014 to 2018. The volume of online installment loans in 2018 was 7.4 times higher than in 2014. While the volume increased until 2016 in the case of online single payment loans, fell in 2017 and remained stable in 2018.
According to the report, more than half of online borrowers are new to the alternative credit space. The table below illustrates consumers who opened a loan online in 2018, tracking their past behavior from 2014 to 2018.
Clarity also tracked the activity of alternative financial borrowers from 2017 to 2018 and whether they continued with online platforms. The results showed that 41% of online borrowers used an alternative loan again, while 24% of borrowers did not show up in 2018. Additionally, 35% of borrowers applied for a loan but did not. have not opened.
Further investigation provided another interesting insight. About 34% of borrowers in 2017 who did not have an application or loan in 2018 had switched to traditional lenders. This means that 7% of all borrowers in 2017 migrated to traditional loans in 2018.
According to a review of the credit classification of consumers who got and did not get loans from traditional lenders in 2018, 23% of borrowers who opted for traditional loans had near-optimal credit scores, and only 8 % of borrowers continued in the alternative. the financial spaces were classified as being close to the best quality.
Factors influencing the migration from online platforms to traditional platforms
While the migration of borrowers from AFS platforms to traditional platforms was not a shock, borrowers who had a subprime credit rating and were not eligible to apply for traditional loans were mostly those who are. went online or in the AFS space to get the credit they needed. . As their credit scores improved, they returned to the traditional space. While AFS is convenient in terms of credit scores and repayment, there are powerful factors that make borrowers revert to traditional methods.
Fraud: With the advent of technology, fraud has also evolved. With data breaches, fraudsters create a synthetic identity that cannot be easily decoded. This is exploited by fraudsters to open additional fake accounts.
Generation bias: Gen Xers are more comfortable with online borrowing and less inclined to go for storefront options. Another study as part of the report implies that the Silent and Boomer generations make up only 25% to 30% of all AFS borrowers.
Income Trends: Over the past five years, online installment borrowers have reported higher income (while values have been stable since 2016) and the reported income of storefront installment borrowers has stagnated since 2014.
Due to the 2008 recession, the majority of borrowers suffered from their creditworthiness. On the other hand, traditional lenders have pulled back due to the toxic assets accumulated on their balance sheets. This created a void for AFS players to capture. It was a win-win because they were able to tap into a market worth hundreds of billions of dollars without dispute, and the borrowers affected were fortunate enough to get the credit they desperately needed.
With record economic growth, the 2019 scenario is different. Borrowers are reverting to traditional modes of borrowing. The Trends Report sheds light on the activities of borrowers and how their needs have evolved over time. In the given scenario, the alternative credit data from Clarity is a key asset when studying the behavior of borrowers in the market.