Importance of Alternative Data in Loan Underwriting

loan underwriting

When people apply for traditional secured loans, banks and lending institutions check the credit score and other financial details of the loan applicant. It puts those Indians at a disadvantage who have do not have a proper credit history or even a banks account. As most of these people are from remote or rural areas, it prevents them from an opportunity to get a loan and get financial help. Thankfully, banks and financial institutions have started implementing alternative data for their loan underwriting process. Let us see how alternative data has changed the underwriting process.

Alternative Data for Loan Underwriting

Alternative data is the data generated by a user on online platforms and the internet. The financial and lending institutions will ask permission to access the alternative data of the loan applicant for the loan underwriting process. Here are some examples:

• Bill payments: Details regarding the payment of any type of bills like mobile recharge, insurance policy, rental charge, loan EMI, utility bills, etc.
• Social media interaction: The data regarding your presence and activity on different social media platforms.
• Location data: Your location history is also taken into account under alternative data. Your travel routes, places you visited, and transportation options may be collected.
• Online shopping transactions: Your activity on e-commerce platforms, shopping history, wish lists, most searched shopping items, etc.

These are some of the alternative data points that financial institutions collect for the loan underwriting process. This data was analyzed to determine the loan applicant’s behavioral patterns, financial habits, and other preferences that can significantly affect their credit underwriting process.

Effectiveness of Alternative Data

Banks and lending institutions need various tools like artificial intelligence algorithms and machine earning models if they plan to use alternative data for the credit underwriting process of loan applicants. As this field of application is still new, thus there can be a certain element of error in the results. The lack of a historical dataset makes it harder to ascertain the results of the credit risk assessment process using alternative data with a hundred percent guarantee.

Still, it is an innovative way to determine the creditworthiness of a loan applicant as it uses new criteria that are more readily available to the user. The availability of cheaper smartphones and the internet has allowed many people to go online and explore the World Wide Web. The increase in connectivity has led to the generation of more alternative data about loan applicants. Here are some of the benefits of using alternative data for the underwriting process.

• This process can be done remotely. People living in even rural and far-flung areas can apply for this through online channels.
• The process is mostly automated and asks for the basic details of the loan applicant. They only need to provide photos of their government identity documents along with the alternative data. The credit underwriting process can then begin.
• The use of alternative data makes the underwriting process faster and more accurate.

From these points, we can see that the use of alternative data allows more people to have access to lending and financial facilities. It also makes the customer base of banks and lending institutions more diverse.

What are the different digital lending models available to customers?

Digital lending has become widely popular since the beginning of the pandemic when banks and other financial institutions were under lockdown. Both startup fin-tech companies and large tech corporations were able to grow during this period. Even though the lockdown has been lifted and banks have started normally operating again, many people still prefer getting loans and credit from digital lending platforms. Here are the different lending models that customers can look out for.

Check out these different digital lending models available on the market:

• Online lending applications: These digital lending platforms offer their services through online channels or mobile applications. The entire process is digital and automated on these lending applications. Thus, customers do not need the help of any person and can follow the instructions mentioned in the lending application to apply for a digital loan. Many startup fin-tech companies fall in this category and they provide small loans to people for their needs.
• P2P Platforms: These types of digital lending platforms are more common in the market. A P2P digital platform helps to connect the individual, who is looking to apply for a loan, with the financial lending institution. The platform plays a key role as it becomes a medium for both parties to engage with each other. These platforms also provide additional services like credit risk assessment, payment options, recollection services, etc.
• Social media and e-commerce platforms: As digital lending became more popular, social media applications and e-commerce platforms also introduced credit systems within their frameworks. Although it was not their main business model, they used their large networks and distribution channels to attract people to use their lending and credit systems although their credit risk assessment and other processes are similar to the online lending platforms.
• Lender searching platforms: One can also find digital platforms that are dedicated to helping individuals get a suitable digital loan from the correct lenders. These platforms use various algorithms and models on the individual’s financial data and then match them with the appropriate financial lending institution. The platform generally charges a fee from both parties for providing this service.
• Mobile network money lenders: These digital lending platforms are similar to social media and e-commerce credit platforms. The mobile network company collaborates with a lending partner for giving out digital loans to its network users. The mobile network company provides this service to all its users where they can conduct transactions and apply for credit from the mobile network application.
• Supply chain lender: This lending method is available only to businesses and small companies. They can avail of a loan from their distributors for the purchase of required goods in advance. This helps them to avail goods for their inventory even if they lack some funds for the complete payment of the delivery. They should ensure that they pay back within the allotted timeframe or their next delivery of goods can be put on hold by the distributor.

These are some of the different types of digital lending models available that provide credit to people and businesses.

Check out these processes which can speed up the loan underwriting process

Financial institutions have started implementing various web technologies in the previous decade. This has resulted in the financial sector becoming more swift, efficient, and inclusive. From the loan application, loan underwriting, and even the loan approval process, each step has become advanced with the help of various innovative solutions. Here are some processes that have made a major positive impact on the lending market.

Inclusion of digital documents and alternative data in the loan underwriting

In the past, a loan applicant needed to carry a lot of paper documents for identity verification and the underwriting process. If the applicant failed to produce any of the necessary documents, they were not considered for the loan approval. Even if they submitted all the paper documents, the loan underwriting process used to take a lot of time. This was a disadvantage for any borrower who needed the loan amount urgently for an emergency. The loan application also weighed a lot on the credit score of the individual. This made it harder for new credit users to get a loan because they lacked a solid credit history.

However, the scenario has changed a lot. Applicants can now provide digital documents while applying online for the loan. This makes it convenient for many people living in remote areas in the country as they do not need to travel with their original paper documents. Apart from the inclusion of digital documents, alternative data is another innovative solution introduced in the lending market. If any loan applicant lacks a high credit score, the lending institution can use alternative data instead for the loan underwriting process. This helps many people to get loans easily at more suitable terms and interest rates.

Introduction automation and data analysis in the loan underwriting

Previously, all the steps of the loan application and underwriting process were done manually by employees of the bank or the lending firm. This is why the credit risk assessment of the loan applicant took a long time. Nowadays, most lending institutions have started using online services and solutions to make these processes faster. Many algorithms and machine learning models have come up that can analyze the loan applicant’s data credentials and check their creditworthiness. The introduction of such automation and data analysis in the loan underwriting process has made it swifter, inclusive, and transparent. These solutions allow credit risk assessment of the applicant to consider more factors apart from their credit score like the alternative data.

The lending institutions also use data analysis for more than just the credit risk assessment process. They can use it to map out the factors that can help more people from remote areas to access loan services. It can also detect the parts where automation can replace the manual processes to make the loan underwriting and approval process more effective.

We can see that these two innovative solutions have made the lending market more accessible to people, especially from remote and rural areas. This is why most banking and lending institutions have started implementing them in some ways in their credit underwriting processes.

How to improve credit score for the underwriting process?

The digital lenders have to make sure that you are creditworthy enough before lending money to you.  The procedure that follows inevitably after the submission of a loan application is the underwriting process which determines whether the borrower is financially stable enough to return the money. The loan application usually needs to be submitted along with plenty of documents which are the indicators of your financial stability. Now among all the factors, credit score plays an important role, the higher the score the better and there is no need to stress the impact of a lower score. But if you really want to clear the underwriting process and get approved for that loan, then take steps to improve it. Here’s how you can do it.

Tips to improve the credit score for the underwriting process:

• The first step that you should take is to get an update on your current credit status. Things can truly improve when you know where your credit score stands on the scale of 300-900. If it is average or, low then you can immediately take the steps to boost it. But before you progress, you have to check whether there are any kind of errors in the report or, not. If there are errors then you have to opt for credit repair to remove those errors from the report.

• To ensure that your credit score is impressive enough for the credit risk assessment process, you must make the payments that have been delayed so far. Clearing away your payment is essential for your score, and make it a point to pay on time.

• Debt clearance would be another factor to consider while dealing with negative credit scores. If you have too many small debts, settle that by taking out a lump sum amount. You can start repaying that later once all the other debts are cleared. However, even if you do not want to go with this solution, still take measures to clear away accumulating debts.

Take care of your credit score and make sure that you are taking the necessary steps to improve the score, and getting that loan approved.

The digital lending platform is welcoming new trends

The digital lending platform is definitely undergoing many ups and downs especially after last year which definitely engulfed us in the shadow of uncertainty.  But here we are not merely talking about the abrupt changes that took place and are shaping the lending landscape, but we are also including the ones that have been gradually surfacing over sometime. The digital lending platform is undergoing changes and it is time to take note and understand the changes so that you can be aware of them and be prepared for the new lending rules.

How digital lending is changing?

• Due to the pandemic last year which is still ongoing and we are still under lockdown, there has been a big shift in the lifestyle. People are working from home and many have gone back to their home towns as well, things can be a little complicated for all. So, there is a trend among the people to spend money in online shopping and they are also buying expensive items like laptops, dishwasher and so on and so forth. The trend is gradually shifting towards consumer loans and the digital lender can completely change the game, if they tap into these segment.

• Another trend which is emerging is that there is a shift towards small loans, mostly the borrowers are reaching towards small amounts which they can return, as their financial situation also altered due to the pandemic situation. However, another thing to note here would be that they are intent on the short loan tenures.

• The emergence of the alternative data for tackling the credit risk assessment process for those who do not have any previous credit history, has been one of the most significant changes something that is reshaping the lending platform.

The digital lending platform is indeed changing and changing for the better, keeping track of the changes is essential for you, if you want to take advantage of them.

Credit Underwriting Process in Banks: What to Know?

Applying for a loan full of expectations that you would get approved and get the money in a couple of days, and then be notified that the bank rejected the application must be a disheartening experience. Especially when you know people who have gotten approval on bigger amounts, it might confuse you regarding what went wrong or, what went against your favor. What stands between you and your digital loan? To understand that you need to understand how the credit underwriting process in banks take place and what you could do to change the outcome. 

The credit risk assessment process: 

When you submit your loan application, the financial institution immediately starts gathering your financial information. You had to submit several documents with your application as required by the lender, and that information along with other information that would be collected from the bureau and all of that would enable the lender to assess your creditworthiness. 

Basically, the credit risk assessment takes place to find out whether you are capable of returning the money that you are borrowing. Your financial stability is required for getting approval from the lender. 

Your credit score plays a significant role here, if your credit score is high then your chances of getting that loan is also higher and vice versa. However, many factors impact the credit score. Your payment history does play a crucial role in deciding your credit score. If you have made all payments on time then that would go in your favor, but a missed payment or, a couple of missed payments can lead to a bad score. Furthermore, too many hard inquiries might have a negative impact. So, you need to be aware of that. You also need to be aware of the credit mix. 

Staying aware of the underwriting process can truly help you improve your chances of getting a loan. 

Managing credit scores is essential to clear the loan underwriting process

When we face some financial issues we often end up applying for a loan, the instant gratification that comes with it is undeniable. However, the process that starts from submitting a loan application and getting approved by the digital lenders is a long and complicated procedure one that takes time and undergoes some complications. The only way your loan could get approval is if the credit risk assessment goes in your favor and for that, your credit score needs to be high. If you are deemed worthy post the assessment then you would be granted the loan. So how to manage your credit score?

How to take care of the credit score for the credit underwriting process?

• Keep track of your credit score, this is very important for you to know where do you stand in terms of your credit score. You can search for the due procedure for getting a copy of your credit score and go through that to understand where do you stand exactly in terms of your credit score. If it is really low then you need to be aware of that and take steps to ensure that you are improving your score before making that application.

• Stay away from too many hard inquiries. Although occasionally making hard inquiries is not going to affect your score, if you are on the other hand making too many hard inquiries in quick succession then that could hamper your score to a great length. So, you should limit your hard inquiries, to save your credit score for the underwriting process.

• If you have too many debts then you must repay those debts, before you can make any move towards obtaining a new loan. If you have too many loans then take out a loan and pay of all. This way you can lighten the load.

Keeping your credit score in check is essential for ensuring it is high enough to secure that loan you are aiming for.

How your Creditworthiness is Assessed

Applying for a loan and getting approval is a process that is full of a good measure of stress and anxiety. Whether it is a bank, or, a fintech that you have approached for the loan they are not going to lend the money unless they assess your creditworthiness. This process is mandatory and at the end of which you get your approval if you are considered eligible or, not. You are familiar with the term, but do you know anything about the process?

Here’s how they check Credit Risk Assessment!

When it comes to creditworthiness, two factors are taken into account one being your ability to pay back the loan along with how likely you are to pay back the loan. The credit score(300-900) plays a big role in the process and CIBIL, Experian, Equifax and CRIF High Mark are the agencies that are in charge of generating the credit score based on the data shared by the organizations. There are several parameters such as your payment history, credit enquiries, credit utilization, credit mix, on the basis of which the credit score is decided and the better your credit score is, the easier it is for you to get the loan, it does play a crucial part in the credit risk assessment.

Now the criteria would always vary and the institutes might have their own parameters which they would like to factor in during the process.

The inclusion of alternative data

The problem happens when a customer does not have enough data for getting a good score, or, even any score. However, now many institutes have started resorting to alternative data to assess the creditworthiness of such customers. The data is gathered from your mobile transactions, bill payment history and other such sources.

Usually the factors that are taken into consideration are your financial ability, non-banking credit history that might include your mobile bill payment pattern, or, even negative incidents like a bounced check.

In fact now the digital lenders are giving preference to using a mix of both traditional data and alternative data to get their assessment done, as it enables them to get a complete picture of the person they are about to lend the money to.

If you are interested in learning more then check the full blog here at: https://www.algo360.com/heres-how-your-bank-assesses-your-creditworthiness/

Identifying the Red Alerts for Collections – Part 3

Continuing from the previous post, we will be moving on with our discussion on how the pandemic brought about uncertainly in the financial lives of people and how it could affect the credit risk assessment. Now that we are going through an unprecedented time it is best to opt for solutions that could help us come up with solutions specifically for problems that the pandemic submerged us in. 

Bringing technology into the current system can help us in a big way, as the early warning system can be used for keeping track of a current portfolio and when this could be integrated, we can hope to get some clear ideas. The system might be able to come up with the probability of the default and how the loss could be mitigated. The digital lenders could immensely benefit from this as they can now easily find the solution they are looking for to carry on despite the grim situation.

Now instead of traditional data, which could not be of any help in this tumultuous situation, it is time to place your trust on the alternative data, which could give you the details you need to assess the loan applicant and get on with your credit underwriting process. 

With the help of advanced technology, the lenders can easily stay alert and would get informed whenever there is some kind of discrepancy. This early warning would help them make the right decision on the basis of adequate information. The best part about using such early warning signals is the fact that the applicants can be classified into groups and their risks could also be assessed methodically leaving nothing to chance. 

The lenders could easily assess which applicants have a higher chance of default and which can repay the loan. On the basis of this, they can steer their business in the right direction despite the uncertain situation. You can also read our previous installment here at: https://creditunderwritingprocess.blogspot.com/2021/01/identifying-red-alerts-for-collections.html

You can read the full blog at : https://www.algo360.com/early-warning-signals-for-collections-part-3/