The 3 C's of Consumer Lending
Historically, character, capacity and collateral — the three "C’s" of consumer lending — have been part of the equation used to determine creditworthiness for loan approval and pricing.
- Character is defined by credit and loan repayment history
- Capacity measures income and ability to service a loan or line of credit
- Collateral refers to asset(s) that could be leveraged for payment
Assessing outstanding balances and whether past loans have been repaid utilizing credit data can reveal elements of character — which may be sufficient information to gauge some risk by way of past behavior.
However, gaining a more complete picture of risk, in relation to capacity to pay and collateral assets of a consumer, is still limited when using only traditional credit data or outdated scores based on a single point in time.
For the sake of both thriving economies and to enable lenders to make smarter decisions, we endeavored to gain more context and increase accuracy when assessing borrowers across the credit spectrum, particularly thin-file consumers and those close to risk tier cut-offs.
A more comprehensive view of capacity to pay and collateral assets
This vision is now a reality: Risk officers can now leverage trended credit information and alternative data – in addition to the traditional credit tradeline data currently being used. Utilizing incremental information such as trended credit and alternative data allows for more precise and risk-appropriate lending decisions.
Smarter decisions can be made based on actual payment amounts and account balance information, repayment trends of installment loans, and information like checking and debit account management.
Understanding capacity to pay and collateral assets
With robust trended credit data combined with alternative information, capacity to pay and collateral assets are better illuminated.
The ability and/or history of making payments above the minimum amount due reveals the capacity a borrower may have to keep financial commitments and potentially manage new lending relationships. Adding to that decisioning power, alternative lending history can reveal a wider breadth of payment insights for additional context to a borrower’s payment behavior and willingness to repay debts outside of traditional tradeline data.
To better understand a borrower’s available collateral, alternative data identifies whether the consumer has an asset(s) that could be leveraged to repay a loan. This could be the equity value of a vehicle or available home value in excess of mortgage amount.
The additional depth and breadth of data points now available not only adds to — but also helps reveal — the accuracy of information lenders already possess, to help enable more precise decisioning of consumers across all credit bands, whether such consumers are:
- near risk-tier cut-offs
- new to credit, un-banked or underbanked/ thin-file, or
- have deep credit histories, revealing balance trajectory over time
Do you have a competitive edge?
Lenders using alternative data and trended credit data are finding they can shed more light on the asset and income components of applicants, to better understand both borrow capacity and collateral — enabling strategic growth by improving acquisition without increasing risk.
Leveraging a hybrid approach to risk scoring with trended credit and alternative data — in addition to traditional trade line data — can also maximize results and ROI by providing affirmation or nullification of known data about willingness to repay debt obligations.
This deeper data intelligence enables lenders to assess a broader universe of potential customers and make more informed decisions across the credit spectrum — for greater financial inclusion.