People facing a serious cash crunch often have to apply for personal loans from commercial banks. They need to understand these financial institutions generally impose stringent eligibility conditions for lending them the money. The lenders insist the borrowers submit certain documents specifying information they want to scrutinize and verify. These normally include their age, personal assets, liabilities, current source of income, and present employment. Moreover, they even have to fill up an application form correctly. However, one important criterion which the financiers analyze thoroughly is the credit score.
What is alternative credit data?
The credit score refers to a three-digit number that measures the likelihood of borrowers to pay off their debts in time. It utilizes the information available on their credit report to speculate the chances of them defaulting in their debt repayments within 24 months. Commercial banks then analyze this information to determine whether or not to sanction their loan applications. The factors influencing the borrowers’ credit score are:
- The payment history, which indicates how often they clear the outstanding debt on their loan on time,
- The total value of their existing outstanding debts, which they are yet to clear,
- Their previous credit history, and
- The diverse portfolio of the outstanding loan accounts such as credit cards and mortgages
Sanctioning personal loan applications of borrowers primarily on credit score limits the commercial banks’ volume of business. These financial institutions also need to look for lucrative lending opportunities. Only then can the lender generate adequate revenue even after paying interest on their depositors’ money. These financiers also look into other sources of information that accurately assess their creditworthiness.
Alternative credit data refers to the big data available on various digital platforms, which does not reflect the borrowers’ credit conduct. These include social media sites, the Internet, unified payment interfaces of smartphones, and e-commerce storefronts. It is normally not found on the borrowers’ credit report. Reliable lenders often refer to this information when conducting a credit risk analysis of potential loanees. However, the financial institutions can use the credit data with the permission of the borrowers, and this comprises of:
- Details of regular, timely rent payments,
- Property records and particulars of other assets which they own in their names,
- The duration of their current bank accounts, including the recurrency of deposits and withdrawals,
- Timely utility bill payments available from data available on unified payment interfaces of their smartphone, and
- Information relating to their demand deposit accounts
The benefits of using alternative credit data to conduct a thorough credit risk analysis for lenders and borrowers are as follows:
- Enables people with no credit history to obtain financial assistance via personal loans,
- Re-evaluates the creditworthiness of other people with a below-average credit score,
- Boosts the financial institutions’ lucrative lending opportunities.
Alternative credit data allows people with a poor credit score to become eligible to apply for personal loans. However, the credit bureau complying with the information should be reliable and have adequate experience. Moreover, the bureau should rely on various in-built regulation compliance parameters to process this information. Only then can it meet the stringent eligibility and fair lending criteria commercial banks impose for personal lending loans.