A Better Way to Evaluate Applicants for Unsecured Personal Loans

Equifax has developed Insight Score™ for Personal Loans, a risk score optimized to help lenders evaluate applicants seeking unsecured personal loans. I talked with Sharla Godbehere, Online and Alternative Financial Services Leader at Equifax, to help financial institution’s better understand why this score is important -- and how it can impact the industry. Here are highlights from our interview.

Personal loans increased 15 percent in 2018 over the year prior. What’s the driving force behind so many consumers needing personal loans?

Godbehere: Many factors are associated with this growth, including the availability of personal loans in the market. Consumers can easily take out a loan to consolidate credit card debt, pay for a wedding, fund a small business venture, buy a car or make small updates to their home. Ten years ago, consumers didn’t have as many loan options as they have today, so they would look to borrow from family members, credit cards and home equity lines of credit. 

Additionally, consumers are more educated about their options. They don’t have to continue to pay high interest rates. They can consolidate debt into one loan at a better rate.

Why do lenders need help evaluating applicants seeking unsecured personal loans?

Godbehere: Personal loans are a highly competitive credit option. If every lender looked at every consumer with the exact same information, the offers would be very similar. In order to provide competitive offers to consumers, lenders need to identify unique ways to look at a consumer. Traditional credit data may not tell the full story on a consumer’s ability to repay a personal loan.

Insight Score does not require consumer-contributed financial data. What does this mean and why is it important?

Godbehere: Today, consumers can provide their login credentials for their bank accounts to access various sources to help with the lending process. Lenders then capture asset and online banking data from these accounts. This is considered consumer-contributed financial data. In keeping with the times, consumers are accustomed to one-click ordering with next-day delivery, and they expect things to be as easy as possible with little to no friction.

Insight Score for Personal Loans uses information from specific databases to better understand how consumers pay their monthly bills without adding friction for the consumer – meaning they don’t have to worry about adding or updating information. As a result, we're able to capture true payment information over time and use that information in combination with traditional credit data to determine a consumer’s chances of repaying a personal loan.

How have you seen alternative data help lenders say yes to consumers more often?

Godbehere: An estimated 25 million consumers do not have a traditional credit file. Plus, there are many more “thin” files with just a few accounts or inquires. 

Alternative data helps lenders assess risks by capturing a more complete picture of the consumer’s ability to manage credit and payments. 

Today, many cell phone payments can be higher than a car payment. Just because a person may only have one or two credit cards with minimal payments doesn’t mean they do not have the capacity to handle a large payment over an extended period of time. Alternative data can help assess that.

In your opinion, how soon before most FI’s are using alternative data to make lending decisions?

Godbehere: Many alternative lenders today use variations of this data. However, Insight Score for Personal Loans provides insight into alternative data never available before. And it doesn't cause additional friction for the consumer. Again, personal loans are very competitive. Therefore, all lenders should be doing whatever they can to say "yes" more often, including looking beyond traditional credit files.

Will Insight Score for Personal Loans be more beneficial to prime, subprime or deep subprime borrowers? Please explain.

Godbehere: Financial institutions can leverage this score across the risk spectrum. However, we do see greater lift with lower scores. But we see additional insight into consumer payment patterns regardless of their traditional credit experience.