Non-prime lending has revolutionized the lending sector. In times where people lack a stable credit history, securing a traditional loan is not easy—and non-prime has become a go-to option in such scenarios. In the past few 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 the borrowers who have a weak credit history. But how do we infer how many people have migrated to non-prime online borrowing from the traditional borrowing set up, and how many people have migrated back to the traditional set up?
Experian’s Clarity Services, a credit reporting agency specializing in near prime and subprime consumers, offers credit data to alternative financial service (AFS) providers. This helps lenders gain a wider perspective of non-prime applicants and further enables them to make more informed decisions.
The company furnishes the AFS trends report that specifies the prevailing trends and consumer behavior in the market by studying the underlying factors. In the 2019 AFS Lending Trends Report, Clarity studied a sample of 350 million consumer loan applications and more than 25 million loans to evaluate the market trends for the 2014 to 2018 time period. Clarity also leveraged Experian’s national credit bureau data to analyze consumer behavior.
Alternative Financial Services — What Do the Market Trends Say?
Non-prime consumers include people who may have been irresponsible with credit previously, youngsters with inadequate credit history, people who face sudden and unexpected emergencies, recent immigrants in the US or someone in immediate need of cash. The basis for the report includes factors of loan origination (involves the online and storefront channels) and loan types (includes installment payments and single pay).
In order to study the rise of the online lending market from 2014 to 2018, Clarity studied online installment and single pay loans by the number of loans originated and total dollars funded.
The graphs illustrate how online installment loans have been steadily growing from 2014 to 2018. The volume of online installment loans in 2018 was 7.4 times higher than the volume in 2014. Whereas, the volume grew up until 2016 in the case of online single pay loans, plummeted in 2017 and held steady in 2018.
As per the report, more than half of online borrowers are new to the alternative credit space. The table below illustrates the consumers who opened an online loan in 2018, tracking their past behavior from 2014 to 2018.
Clarity also tracked the activity of 2017 alternative financial borrowers in 2018 and if they continued with online platforms. The results showed that 41% of online borrowers again availed an alternative loan, while 24% of the borrowers did not show up in 2018. Also, 35% of the borrowers applied for a loan but did not open one.
Further investigations gave another interesting insight. Around 34% of 2017 borrowers who did not have any applications or loans in 2018 had switched to traditional lenders. This implies that 7% of overall 2017 borrowers migrated to traditional lending in 2018.
As per an examination of the credit classification of consumers who obtained and did not obtain loans from traditional lenders in 2018, 23% of borrowers who switched to traditional lending possessed a near prime credit score, and only 8% of the borrowers continuing in the alternative finance space were classified as near prime.
Factors Influencing Migration from Online Platforms to Traditional
While the migration of borrowers from AFS platforms to traditional ones might not be a shocker, borrowers who had a subprime credit score and were ineligible to apply for traditional loans were mostly the ones who moved to online or the AFS space to get the credit they needed. As and when their credit scores improved, they reverted to the traditional space. While AFS is convenient in terms of credit scores and repayments, there are strong factors that influence the borrowers to move back to traditional methods.
Frauds: With the advent of technology, fraud too has evolved. With data breaches, the fraudsters create a synthetic identity that cannot be easily decoded. This is leveraged by fraudsters to open fake and additional accounts.
Generation Bias: Gen X is more comfortable with online borrowing and less likely to be inclined towards storefront options. Another study under the report implies that the Silent and Boomer generations only account for 25% to 30% of all AFS borrowers.
Income Trends: In the past five years, online installment borrowers reported a higher income (while the values have been steady since 2016) and the reported incomes of storefront installment borrowers have been stagnant since 2014.
Due to the recession in 2008, the majority of borrowers had suffered a hit to their credit worthiness. On the other side, traditional lenders folded due to the toxic asset built up in their balance sheets. This created a vacuum for the AFS players to capture. It was a win-win as they were able to tap into a multi-hundred-billion-dollar market unchallenged, and the affected borrowers got a chance to get the credit they needed desperately.
With record economic growth, the 2019 scenario is different. Borrowers are returning to traditional ways of borrowing. The trends report puts light on the activities of the borrowers and how their needs have changed over time. In the given scenario, Clarity’s alternative credit data is a key asset when studying borrower behavior in the market.