Consumers with Significant Liquidity Needs Often Access Alternative and Traditional Credit Markets Concurrently

Study from TransUnion finds that lenders may not always get the full picture of a consumer’s indebtedness

CHICAGO, Sept. 26, 2019 (GLOBE NEWSWIRE) -- Many lenders believe that consumers who turn to the alternative credit market for liquidity do so because they have no other options. However, a TransUnion (NYSE: TRU) study presented today at the Lend360 conference found that these borrowers are frequently applying for and receiving traditional credit at the same time. While traditional subprime installment lenders and alternative lenders are competing over the same consumers, the study finds that the liquidity need is often not fully met in either market.

“Alternative credit consumers are not just shopping for small dollar and short-term loans. Rather, they are looking for and receiving unsecured personal loans and other traditional credit products at the same time,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion. “More avenues to secure loans is a plus for borrowers, but lenders in both markets need visibility across the consumer’s entire wallet to effectively manage this risk.”

The study determined that first-time entrants in the alternative credit market see a significant uptick in traditional originations within one month of originating an alternative loan. Alternative loans include small dollar and short-term loans not typically reflected in the traditional credit file.

One year after originating their first alternative loan, traditional balances for these consumers are 1.6x higher than similar consumers who have not originated an alternative loan, controlling for risk. “Lenders who look exclusively at either the traditional or alternative credit file will not have visibility into how consumers are tapping into both markets to meet liquidity needs in excess of what’s available to them in the traditional space alone,” said Pagel. 

Traditional Loan Outstanding Balances Rise Following Entry into the Alternative Credit Market

Length of Time
Traditional Loan Outstanding Balance
Percent Change for those Consumers
who do NOT have an Alternative Loan
Traditional Loan Outstanding Balance
Percent Change for those Consumers
with an Alternative Loan
3 Months2%4%
6 Months3%6%
9 Months5%9%
12 Months7%12%

*Outstanding traditional debt indexed to post-entry point

Risk Levels Higher for Traditional and Alternative Loan Borrowers

While 9 in 10 consumers paid satisfactorily on the traditional unsecured personal loans they originated around the same time as they entered the alternative credit market, the incidence of serious delinquency (60 or more days past due) was significantly higher.

Controlling for risk score, 8.5% of the alternative credit-active consumers had a serious delinquency in the first 12 months, vs. just over 2% for the control group. Bankcard performance was also worse. While these borrowers exhibited a preference for unsecured personal loans under $1,500 within 12 months of the alternative credit origination, they also originated auto and bankcard credit during that time.

Without access to the alternative credit file, traditional lenders would not have the full picture of the true risk level of such consumers. As a result, consumer total indebtedness at the time of decisioning may be heavier than estimated using traditional credit data alone if the consumer previously participated in the alternative credit market.

“The distribution of traditional credit scores of first-time entrants into the alternative credit market does deteriorate over time, reflecting the higher-risk nature of this consumer group. That’s because a traditional credit score does not directly take into account whether a consumer accessed alternative credit in the past year or received both traditional and alternative loans concurrently,” added Pagel.

Predicting Entry into the Alternative Credit Market

The study also assessed a consumer’s likelihood to enter the alternative credit market for the first time, based on information found in the traditional credit file alone. The presence of a bankruptcy or charge-off on the traditional credit file was predictive of an entry into the alternative market, even when the consumer could qualify for a traditional credit product.

Lenders in both markets could leverage this information to understand a borrower’s propensity to seek credit in either market. These borrowers are actively seeking credit, with significantly more inquiries on the traditional credit file than those borrowers who did not ultimately enter the alternative credit marketplace.

“A combined picture of traditional and alternative credit histories can offer a more holistic view of the overall risk level of consumers who may have been active in both markets. Furthermore, propensity models can predict a consumer’s anticipated entry into the alternative credit market, enabling lenders to mitigate risk or seize opportunities within the segment. With these insights, both traditional and alternative lenders can take timely action and refine their target populations,” concluded Pagel.

For more information, download the “Consumer Migration into the Alternative Credit Market” quick guide or click here to learn more about TransUnion’s CreditVision Link and CreditVision Link Short-Term Risk Score.

About TransUnion (NYSE: TRU)
Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Europe, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.

We call this Information for Good.®

Contact Dave Blumberg