Prepare to Give Lenders More Personal Information on Applications (Here’s Why)
For years your credit report data was enough for lenders to judge whether or not you are worthy of a personal loan. Recently, however, lenders have become hungry for what almost all companies want in 2020; more data.
According to a 2018 report by the independent research and advisory firm Aite Group, some fin-tech companies and lenders are now requiring alternative data such as income, occupation and education data in addition to credit score information before granting a personal loan.
Personal loans are what they sound like; a loan used by anyone for various expenses such as home repair, wedding or moving costs. Lenders are utilizing alternative data in order to protect themselves from poor personal loan decisions, as well as gain new customers who may otherwise be at a disadvantage when being judged on credit score alone.
Alternative Financial Data: Friend or Foe?
A recent report by the Consumer Financial Protection Bureau (CFBC) revealed that 22% of Americans don’t have a credit score at all, limiting their means to obtain personal loans, large purchases such as a house or car. Chi Chi Wu, an attorney with the National Consumer Law Center, a consumer advocacy group, says using alternative financial data comes with its own set of risks and disadvantages.
It’s the education and career data in a loan application, that “replicates existing inequality and it reinforces it,” Wu stated.
Wu is referring to the inequalities related to career and education areas. A 2018 Bureau of Labor Statistics report shows that employed white and Asian people hold the majority for working in professional or management fields.
Experian PLC, a consumer credit reporting company released a 2019 study showing that loan companies are attempting to avoid racial discrimination by focusing on solely the verification of income and employment, and property judgments for top sources of alternative data.
Millennials are also being rejected more and more for loans; another reason why alternative financial data may help improve their credit risks.
Contempt for Credit Scores?
Alternative data is becoming popular for a reason; both lenders and consumer advocates agree that the credit scoring system has flaws. Consumers would be wise to review and correct their credit reports if they spot errors, which is free of charge.
Regardless of the errors and confusion, Experian PLC found that only 42% of consumers believe they are better borrowers than their credit scores represent.
Chief Product Officer of the online lender Earnest, David Green, says his company uses both credit score and bank account information to give a holistic view of a person’s financial actions.
“(Your credit score) is still a big deal because…it’s a very robust dataset and it’s an important part of your financial story,” said Green. “I looked at thousands and thousands of credit reports….a lot of times you can tell (the credit score) is telling the wrong story.”
Calls for Clarity
With consumer data becoming more scrutinized and utilized by data lenders, consumers need to be aware and be able to access information with a high degree of transparency, said Brent Adams, Senior Vice President of policy and communication for the Chicago-based financial research and advocacy nonprofit Woodstock Institute.
“There’s another piece of this…it’s inevitable,” Adams said. “There’s no real point in digging one’s heels in.”