Consumers with Significant Liquidity Needs Often Access Alternative and Traditional Credit Markets Concurrently
September 26 2019 - 8:00AM
Many lenders believe that consumers who turn to the alternative
credit market for liquidity do so because they have no other
options. However, a TransUnion (NYSE: TRU) study presented today at
the Lend360 conference found that these borrowers are frequently
applying for and receiving traditional credit at the same time.
While traditional subprime installment lenders and alternative
lenders are competing over the same consumers, the study finds that
the liquidity need is often not fully met in either market.
“Alternative credit consumers are not just shopping for small
dollar and short-term loans. Rather, they are looking for and
receiving unsecured personal loans and other traditional credit
products at the same time,” said Liz Pagel, senior vice president
and consumer lending business leader at TransUnion. “More avenues
to secure loans is a plus for borrowers, but lenders in both
markets need visibility across the consumer’s entire wallet to
effectively manage this risk.”
The study determined that first-time entrants in the alternative
credit market see a significant uptick in traditional originations
within one month of originating an alternative loan. Alternative
loans include small dollar and short-term loans not typically
reflected in the traditional credit file.
One year after originating their first alternative loan,
traditional balances for these consumers are 1.6x higher than
similar consumers who have not originated an alternative loan,
controlling for risk. “Lenders who look exclusively at either the
traditional or alternative credit file will not have visibility
into how consumers are tapping into both markets to meet liquidity
needs in excess of what’s available to them in the traditional
space alone,” said Pagel.
Traditional Loan Outstanding Balances
Rise Following Entry into the Alternative Credit
Market
Length of Time Post-Entry |
Traditional Loan Outstanding Balance Percent Change for
those Consumers who do NOT have an Alternative Loan |
Traditional Loan Outstanding Balance Percent Change for
those Consumers with an Alternative Loan |
3 Months |
2% |
4% |
6 Months |
3% |
6% |
9 Months |
5% |
9% |
12 Months |
7% |
12% |
*Outstanding traditional debt indexed to post-entry point
Risk Levels Higher for Traditional and Alternative Loan
Borrowers
While 9 in 10 consumers paid satisfactorily on the traditional
unsecured personal loans they originated around the same time as
they entered the alternative credit market, the incidence of
serious delinquency (60 or more days past due) was significantly
higher.
Controlling for risk score, 8.5% of the alternative
credit-active consumers had a serious delinquency in the first 12
months, vs. just over 2% for the control group. Bankcard
performance was also worse. While these borrowers exhibited a
preference for unsecured personal loans under $1,500 within 12
months of the alternative credit origination, they also originated
auto and bankcard credit during that time.
Without access to the alternative credit file, traditional
lenders would not have the full picture of the true risk level of
such consumers. As a result, consumer total indebtedness at the
time of decisioning may be heavier than estimated using traditional
credit data alone if the consumer previously participated in the
alternative credit market.
“The distribution of traditional credit scores of first-time
entrants into the alternative credit market does deteriorate over
time, reflecting the higher-risk nature of this consumer group.
That’s because a traditional credit score does not directly take
into account whether a consumer accessed alternative credit in the
past year or received both traditional and alternative loans
concurrently,” added Pagel.
Predicting Entry into the Alternative Credit
Market
The study also assessed a consumer’s likelihood to enter the
alternative credit market for the first time, based on information
found in the traditional credit file alone. The presence of a
bankruptcy or charge-off on the traditional credit file was
predictive of an entry into the alternative market, even when the
consumer could qualify for a traditional credit product.
Lenders in both markets could leverage this information to
understand a borrower’s propensity to seek credit in either market.
These borrowers are actively seeking credit, with significantly
more inquiries on the traditional credit file than those borrowers
who did not ultimately enter the alternative credit
marketplace.
“A combined picture of traditional and alternative credit
histories can offer a more holistic view of the overall risk level
of consumers who may have been active in both markets. Furthermore,
propensity models can predict a consumer’s anticipated entry into
the alternative credit market, enabling lenders to mitigate risk or
seize opportunities within the segment. With these insights, both
traditional and alternative lenders can take timely action and
refine their target populations,” concluded Pagel.
For more information, download the “Consumer Migration into the
Alternative Credit Market” quick guide or click here to learn more
about TransUnion’s CreditVision Link and CreditVision Link
Short-Term Risk Score.
About TransUnion (NYSE: TRU)Information is a
powerful thing. At TransUnion, we realize that. We are dedicated to
finding innovative ways information can be used to help individuals
make better and smarter decisions. We help uncover unique stories,
trends and insights behind each data point, using historical
information as well as alternative data sources. This allows a
variety of markets and businesses to better manage risk and
consumers to better manage their credit, personal information and
identity. Today, TransUnion has a global presence in more than 30
countries and a leading presence in several international markets
across North America, Africa, Europe, Latin America and Asia.
Through the power of information, TransUnion is working to build
stronger economies and families and safer communities
worldwide.
We call this Information for Good.®
http://www.transunion.com/business
Contact |
Dave
Blumberg |
|
TransUnion |
E-mail |
david.blumberg@transunion.com |
Telephone |
312-972-6646 |
TransUnion (NYSE:TRU)
Historical Stock Chart
From Mar 2024 to Apr 2024
TransUnion (NYSE:TRU)
Historical Stock Chart
From Apr 2023 to Apr 2024