Loyalty and Fluidity in Alternative Financial Services and Traditional Lending

Growth of Funded Loan Volume Online

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 […]

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Growth of Funded Loan Volume Online

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.

Growth of Funded Loan Volume ($) – Online

 

Growth of Funded Loan Volume ($) – Online Single

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.

Conclusion

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.

Download the complete 2019 Alternative Financial Services Lending Trends report on Clarity’s website.

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Alternative Lending: Insights from Clarity

online installment loan amounts

With billions of dollars in monthly origination and listed players like Lending Club, alternative lending is now mainstream in the United States. Experian’s Clarity Services, a specialist in alternative financial services data and solutions, has released a report titled Alternative Financial Services Lending Trends. It includes deep insights into the online consumer lending industry and […]

The post Alternative Lending: Insights from Clarity appeared first on Lending Times.

online installment loan amounts

With billions of dollars in monthly origination and listed players like Lending Club, alternative lending is now mainstream in the United States. Experian’s Clarity Services, a specialist in alternative financial services data and solutions, has released a report titled Alternative Financial Services Lending Trends. It includes deep insights into the online consumer lending industry and leverages data points of over 350 million consumer loan applications and 25 million loans.

The report threw a lot of expected statistics and some surprises that should help online lenders pivot to more fertile territory.

Understanding the Channels

Alternative financial services can be obtained from both online and offline platforms. Though online platforms are mushrooming, brick and mortar still remains dominant in the consumer lending industry.

Types of loans

The types of loans in the report are broadly classified in two categories-

  1. Installment loans – Loans repaid in a series of regular payments (months or years) are known as installment loans.
  2. Single pay – Single pay loans are repaid in a single payment (Lump sum) and usually have a shorter tenure (days/weeks).

Market Trends- Product Mix

Everybody is aware of the fact that online lending has grown, but the growth numbers presented by Clarity are staggering. Following are the charts that capture the growth pattern of online installments and online single pay loans in regards to funded loan volume and the number of funded loans from 2014 to 2018.

The online installment loans marked a growth of approximately 643% in 2018 starting from 2014 whereas the single pay loans’ market doubled in four years.

The number of loans analysis threw similar growth numbers as the loan volume analytics.

Data suggests that online installments loans are the most popular choice in the alternative lending space. The number of unique borrowers has increased by 30% for the past three years.

Loan Characteristics

Installment Loans

  • Loan amount Almost 60% of loans fell between the $500 to $2000 range in 2018, rising from 43% of all loans in 2014. Only 15% of the funded loans were under $500 in 2018. Therefore the average loan amount is increasing on a year-on-year basis.
  • Loan Tenure – Maximum loans (over 62%) had a repayment period of over 7 months in 2018 whereas only 9% online installment loans have a payment period of fewer than three months.
  • Scheduled monthly payment amount – The monthly payment amounts have declined over time. Around 34% of monthly repayments were less than $200 in 2018. This number is an increase from 17% in 2015.

Single Pay Loans

  • Loan Amount – Loans above $500 grew from 23% to 28% between 2014 and 2018. The overall trend is towards an increasing loan amount.

Credit Quality

A credit profiles analysis indicates that online lending is finding favor among not only the subprime category but also the prime and near-prime, which are aggressively adopting alternative financing options.  Clarity reports that 29% of consumers with an alternative credit inquiry fell into the prime or near-prime categories in 2018 compared to 21% in 2017.

Consumer Demographics

  • Age – The online installment borrowers were older than the online single pay borrowers whereas the age of installment and single pay loans’ borrowers remains the same in the case of the storefront channel.

  • Income trend – The online borrower reported a higher income as compared to one borrowing through a storefront.

In the online segment, income values tend to be higher for Installment loans than single pay loans.

  • Data Points:

– Forty-five per cent of online installment borrowers reported an annual income over $40,000, while 37% of single pay borrowers reported incomes in this range.

– Conversely, 15% of single pay borrowers reported an income of less than $20,000, as opposed to only 8% of installment borrowers.

Hence consumers falling under the category of online installment loans are likely to have a higher income as compared to other sub-groups.

  • Consumer Choice – Consumers that prefer privacy opted for online lending whereas the consumers that were looking out for a reliable personalized experience went for the storefront option.
  • Location – California and Texas are the obvious leaders due to their size. Ohio is steady at third place for the last 3 years with Illinois at the 8th position.

Takeaway

Clarity’s alternative credit loan data provides key learning points for all in the alternative lending industry.

  • The Online Installment Loan market is growing and the demographics support further growth.
  • The online installment loans are being increasingly characterized by larger loan amounts, longer payment terms, and smaller scheduled payment amounts.
  • There are early signs of deterioration in credit performance.
  • Over half of the online borrowers in 2018 were new to the alternative lending space.
  • Applicants new to the alternative lending space in 2018 have higher credit scores than those previously seen. However, 2017 borrowers who migrated to traditional lending in 2018 also had higher credit scores than those who stayed with alternative financial services.
  • California, Texas, and Ohio continue as the top three states for online lending in number of loans, while the largest growth in borrowers is in the middle states like Nebraska and Kentucky.

Insight: Online Lenders will be well served to identify patterns like an increase in loan amount and loan tenure and the rise of Middle America looking for hassle-free lending options.

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