Most individuals and small entrepreneurs visit commercial banks to apply for short-term low-interest loans whenever they face a cash crunch. These institutional lenders insist the loan takers meet their stringent eligibility conditions before offering them any financial assistance. This is necessary to assess the creditworthiness of the borrowers to minimize the banks’ risks of incurring bad debts.
The borrowers normally need to fill up a lengthy loan application form and provide copies of certain documents. The paperwork gives the financiers valuable insights into the borrowers ‘credit and repayment history. Above all, the banks closely analyze the loan applicants’ credit score, which they obtain from trustworthy credit rating agencies.
How do alternative credit scoring agencies benefit banks?
A credit score is a three-digit number that reliable credit rating agencies assign to borrowers applying for commercial loans. The figure determines their ability to repay the entire loan amount they seek from commercial banks on time. The credit rating agencies calculate it after thoroughly analyzing the following information relating to the borrowers:
- The number of bank accounts they operate,
- The category under which the bank accounts fall such as savings, current or recurring,
- Details relating to their repayment history and ability to clear outstanding debts on time,
- Existing outstanding loans such as mortgages or credit card debts which they are yet to clear,
- Their previous credit history, and
- The frequency with which they apply for which new loans.
This implies people who have a low or non-existent credit score become illegible for commercial loans at competitive interest rates. Bank lenders categorize these loan applicants as ‘’sub-prime borrowers’’. The financiers are always looking for ways to assist this class of loan takers financially. They can do so by working with reliable credit bureaus using the latest alternative credit scoring models. Alternative credit is the method of evaluating the creditworthiness of borrowers by analyzing their consumer behavior data on various digital platforms. This information can consist of:
- Online buying data on their social media accounts and e-commerce’ websites,
- Details of smartphone money usage,
- The consistency with which they pay their tax liabilities, rent, and utility bills on time,
- Airtime usage and history,
- Details of health and life insurance in their name, and
- The title deeds of property they own in their name on the government’s website.
The advantages of hiring the services of alternative credit rating bureaus to evaluate borrowers’ creditworthiness for lenders are as follows:
- Allows the lenders to introduce their lending schemes to a larger targeted audience,
- Enables the lenders to fulfill their social responsibility of eradicating wealth inequalities in society, and
- It helps the lenders assist vulnerable sectors of society in improving their economic conditions.
Hiring reliable credit bureaus using the latest alternative credit scoring models to evaluate borrowers’ creditworthiness is a boon for lenders. It allows financiers to introduce their lending schemes to borrowers with a low credit score. However, the agencies they choose to work with should have a good market reputation. Moreover, the credit scoring models they use should incorporate the latest artificial intelligence, robotic automation, and machine-learning technology. Above all, the prices the agencies charge should be within the lenders’ budget.