With billions of dollars in monthly origination and listed players like Lending Club, alternative lending is now mainstream in the United States. Experian’s Clarity Services, a specialist in alternative financial services data and solutions, has released a report titled Alternative Financial Services Lending Trends. It includes deep insights into the online consumer lending industry and leverages data points of over 350 million consumer loan applications and 25 million loans.
The report threw a lot of expected statistics and some surprises that should help online lenders pivot to more fertile territory.
Understanding the Channels
Alternative financial services can be obtained from both online and offline platforms. Though online platforms are mushrooming, brick and mortar still remains dominant in the consumer lending industry.
Types of loans
The types of loans in the report are broadly classified in two categories-
- Installment loans – Loans repaid in a series of regular payments (months or years) are known as installment loans.
- Single pay – Single pay loans are repaid in a single payment (Lump sum) and usually have a shorter tenure (days/weeks).
Market Trends- Product Mix
Everybody is aware of the fact that online lending has grown, but the growth numbers presented by Clarity are staggering. Following are the charts that capture the growth pattern of online installments and online single pay loans in regards to funded loan volume and the number of funded loans from 2014 to 2018.
The online installment loans marked a growth of approximately 643% in 2018 starting from 2014 whereas the single pay loans’ market doubled in four years.
The number of loans analysis threw similar growth numbers as the loan volume analytics.
Data suggests that online installments loans are the most popular choice in the alternative lending space. The number of unique borrowers has increased by 30% for the past three years.
- Loan amount – Almost 60% of loans fell between the $500 to $2000 range in 2018, rising from 43% of all loans in 2014. Only 15% of the funded loans were under $500 in 2018. Therefore the average loan amount is increasing on a year-on-year basis.
- Loan Tenure – Maximum loans (over 62%) had a repayment period of over 7 months in 2018 whereas only 9% online installment loans have a payment period of fewer than three months.
- Scheduled monthly payment amount – The monthly payment amounts have declined over time. Around 34% of monthly repayments were less than $200 in 2018. This number is an increase from 17% in 2015.
Single Pay Loans
- Loan Amount – Loans above $500 grew from 23% to 28% between 2014 and 2018. The overall trend is towards an increasing loan amount.
A credit profiles analysis indicates that online lending is finding favor among not only the subprime category but also the prime and near-prime, which are aggressively adopting alternative financing options. Clarity reports that 29% of consumers with an alternative credit inquiry fell into the prime or near-prime categories in 2018 compared to 21% in 2017.
- Age – The online installment borrowers were older than the online single pay borrowers whereas the age of installment and single pay loans’ borrowers remains the same in the case of the storefront channel.
- Income trend – The online borrower reported a higher income as compared to one borrowing through a storefront.
In the online segment, income values tend to be higher for Installment loans than single pay loans.
- Data Points:
– Forty-five per cent of online installment borrowers reported an annual income over $40,000, while 37% of single pay borrowers reported incomes in this range.
– Conversely, 15% of single pay borrowers reported an income of less than $20,000, as opposed to only 8% of installment borrowers.
Hence consumers falling under the category of online installment loans are likely to have a higher income as compared to other sub-groups.
- Consumer Choice – Consumers that prefer privacy opted for online lending whereas the consumers that were looking out for a reliable personalized experience went for the storefront option.
- Location – California and Texas are the obvious leaders due to their size. Ohio is steady at third place for the last 3 years with Illinois at the 8th position.
Clarity’s alternative credit loan data provides key learning points for all in the alternative lending industry.
- The Online Installment Loan market is growing and the demographics support further growth.
- The online installment loans are being increasingly characterized by larger loan amounts, longer payment terms, and smaller scheduled payment amounts.
- There are early signs of deterioration in credit performance.
- Over half of the online borrowers in 2018 were new to the alternative lending space.
- Applicants new to the alternative lending space in 2018 have higher credit scores than those previously seen. However, 2017 borrowers who migrated to traditional lending in 2018 also had higher credit scores than those who stayed with alternative financial services.
- California, Texas, and Ohio continue as the top three states for online lending in number of loans, while the largest growth in borrowers is in the middle states like Nebraska and Kentucky.
Insight: Online Lenders will be well served to identify patterns like an increase in loan amount and loan tenure and the rise of Middle America looking for hassle-free lending options.