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 steps that you will find in a loan underwriting process?

Mortgages are tools that help borrowers to get money from banks and other financial institutions for their needs. Whether it be for buying a car or home, health emergency, education fees, or any other such demand, people generally consider taking out loans to pay for them. It is because these expenses require a lot of money which is not readily available to most people. While applying for a loan, the borrower has to undergo the loan underwriting process first as it helps the banks or digital lenders to determine the creditworthiness of the individual. The following steps are carried out in this process.

Here is an overview of the steps of the loan underwriting process:

• You need to get pre-approved by the lenders first: Even before you apply for a loan, you can go to the bank and digital lender to get pre-approved for the loan. In this process, they use the current financial information that you provide to ascertain if you are fit to receive a particular type of loan or not. It is like a pre-check-up that is done even before the loan underwriting process starts.

• The verification of your submitted financial details: After getting pre-approval, you can apply for the loan and submit all the documents and information asked by the bank or digital lenders. The loan underwriting process begins when they start verifying all your financial details. Your credit score, credit history, income sources, bank account details, evaluation of the collateral or assets, insurance policies, investments, and all other types of financial activity is checked. It helps the banks and digital lenders to analyze the creditworthiness of the individual.

• Checking the liabilities of the borrower: After verifying the financial details, the banks and digital lenders also check for the liabilities of the loan applicant. The credit history is analyzed to see if the borrower can pay back the loan within the time limit. The banks and digital lenders analyze if the borrower makes consistent payments of bills and whether they have any outstanding debts on their record. They also check if the loan applicant has applied for any other loans or credit during the loan underwriting process. This data helps the banks and digital lenders to determine the financial condition of the borrower.

• Deciding on the loan application: This is the last stage of the loan underwriting process where the banks or digital lenders decide on the status of the loan application. Here are a few different categories that can be given.

• Denied: Your application may be denied due to various risk factors found in the credit underwriting process.
  • Suspended: Your loan application may be suspended if you have not submitted all the documents or if some financial information cannot be confirmed for the credit underwriting process.
  • Approved with conditions: In this option, the loan application is approved but with additional conditions that the borrower has to fulfill to avail of the loan amount.
  • Approved: The loan application is approved when every document is verified, and the borrower is deemed creditworthy for the loan.

These are the stages followed during the loan underwriting process done by banks and digital lenders.

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.