Although a lot of people have started to use digital transactions since the start of the pandemic, a large population of our country still deals in cash. These people, mainly from semi-urban and rural areas, lack a long credit history and may find it hard to get loans from digital lending platforms. Thus if online lending platforms want to attract them as potential customers, they need to use alternative data solutions to check the creditworthiness of these individuals.
The benefits of using alternative data for loan underwriting are:
● People without any previous credit can apply for loans: As discussed earlier, a lot of people in our country, especially from developing areas, still use cash for their financial needs and payments. As they do not have any online credit transactions or history, their calculated credit scores using this financial data might be meager and sub-par. Thus if online lending institutions use alternative data to check the creditworthiness of their applicants, many people will have a higher credit score which in turn increases their chances of receiving a loan quickly.
● It makes the underwriting process more accurate: Digital lending platforms have started using alternative data for checking the creditworthiness of their loan applicants. Apart from normal digital credit usage history, it also takes into account the alternative ways to score credit. This allows people from all walks of life to have a more accurate credit score. This is because if a certain individual still does not have a credit card or a credit report, the alternative data used during the underwriting process can help to boost their credit score. Some online lending institutions have already implemented the alternative data mechanism into their credit score calculation algorithms.
● The credit underwriting process becomes faster: As alternative data solutions provide additional financial data about the loan applicant, this can speed up the credit underwriting and the loan approval procedures. This is beneficial for people who need the loan amount quickly for their emergency. Although the process becomes fast, the credit risk assessment does not drop its accuracy in identifying a credit-worthy individual.
● Alternative data allows the institutions to attract customers from every section of society: The use of alternative data has made it easier for people from all sections of society to get loans. Regardless of their previous lack of financial history, this mechanism allows them to gain a lot from these beneficiary solutions. Apart from receiving digital loans, they can start their credit history which will prove to be crucial in future credit underwriting processes. This is why even governments have started to back the use of alternative data solutions. It allows a large population of the country to become financially active and this huge participation can further drive the economy.
These four benefits have popularized the use of alternative data. Both private or governmental lending institutions and partners have started using it to speed up their loan underwriting process and give out credit to more eligible loan applicants.
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