By: Javi Calderon
More Data Means More Loans for Low Income Borrowers
While critics of short-term loans disagree, lenders are starting to find better and more cost-effective ways of extending payday loans to low-income borrowers by taking into consideration a wider range data points.
In fact, all kinds of companies are benefiting from increased statistical analysis. By crunching and splitting data differently, companies are able to identify waste and opportunity more readily, allowing them to adjust their distribution of resources to maximize their potential.
Against popular belief, the majority of payday loan lenders are not evil loan sharks, simply merchants like anyone else. High interest rates are due to the risk of extending credit to risky borrowers, not greed.
Progressive payday lenders are using statistical analysis, or data mining, to develop new products for needy consumers, and create more accurate snap shots of customers’ payment tendencies. The increased data points are allowing lenders to reach 15% more borrowers, who were otherwise considered unqualified, while also cutting borrowing fees in half thanks to the more accurate portrayal of a consumer’s risk.
Leading the charge is a former Google executive turned cash advance lender, Doug Merrill, who swears that his approach leads to better value for consumers. Merrill’s system takes into account over a thousand variables, including things like payment history for pre-paid phones, when evaluating a potential customer. Interestingly, the person’s FICO score (the credit score most used by lenders) is not taken into account in Merrill’s model.
Merrill believes that his system will soon be used to evaluate the creditworthiness of credit card applicants.
Recently FICO introduced a new credit score known as the CoreScore, which like Merrill’s system takes into account untraditional data points when calculating a person’s credit score. While the CoreScore was designed to hopefully make credit more accessible to lower income borrowers, critics argue that it will only widen the chasm between those with good credit and bad credit by painting an even more accurate portrayal of the individual’s negative payment tendencies.
Critics also feel that the new score is only an attempt to tap the under-banked population as a new revenue stream. Proponents accurately point out that instead of further restricting the options for Americans with bad credit, financial institutions should be pushing to find new products and ways to serve their needs.