How Real-Time Data Is Helping Non-Prime Borrowers Score Better Loans
A subpar credit score can be the Scarlet Letter on a borrower’s prospects of getting a loan, let alone one with reasonable interest rates. But one company, Ascend Consumer Finance, is moving beyond traditional credit scores to continually assess and re-price risk by using an innovative combination of data, technology, and analytics. “All consumers are painted with a broad brush,” says Ascend CEO Steve Carlson. “Most lenders think that if you’re a non-prime customer, you’re a bad borrower. We want to dispel this myth, as we know that credit scores are a notoriously poor lagging indicator of risk.”
Traditionally, lenders have relied on credit scores as the litmus test for assessing a borrower’s likelihood to repay a loan. More recently, some lenders have begun utilizing alternative data sources in an attempt to better predict risk while making a decision to lend to customers. Ascend, however, has adopted an entirely new approach that monitors a borrower’s financial behaviors after they take out a loan, to continually re-assess and re-price their risk. “This concept of using individualized real-time data and insights has been successfully adopted by a range of risk-based industries globally,” says Carlson. “It’s really exciting to be leading the way into the next generation of lending by bringing the concept to consumer finance.”
Ascend is working to integrate that real-time approach throughout the life of a borrower’s loan. Its first product, RateRewards, gives borrowers with credit scores between 580 and 660 the option having their financial health monitored month-to-month to lower their interest costs based on displayed good financial behaviors. While Rate Rewards is optional, half of Ascend’s borrowers choose to opt into the program and, of those, half end up saving an average of $300 over the life of their loan, says Carlson, who co-founded Ascend in 2014.
Carlson knows all too well that the non-prime consumer finance market is ripe for change. The former head of marketing and business development at Intuit Financial Services — where he worked on Mint.com and Quicken – Carlson has also worked at HSBC and Washington Mutual, advised and invested in multiple other startups, and sits on the Consumer Financial Protection Bureau’s Consumer Advisory Board.
Nearly a third of the U.S. population consists of non-prime borrowers, says Carlson. Adjusting interest rates for these borrowers month-to-month based on good financial behavior could have a positive impact on an estimated 35 million Americans. “There are about 110 million Americans considered non-prime in the U.S.,” says Carlson. “About a third of those people should have a credit score that’s better than what is reflected today.”
RateRewards’ adaptive risk pricing model monitors borrowers in real-time on three specific behaviors, and rewards good behavior by decreasing their interest expense up to 50% each month. For instance, a borrower who reduces her overall debt level by at least $50 a month gets a reduced interest cost of up to 10% over time, as would a borrower spending less than $50 a month on credit, or putting at least $50 a month into a savings account. Achieving all three behaviors results in a combined 30% monthly interest expense reduction.
The reasoning behind this: Data clearly shows that customers who continually perform such behaviors are a lower risk to Ascend and should be rewarded as such. What’s more, those willing to build their savings by putting at least $50 aside each month not only improve their interest rate, says Carlson – they create a critical emergency savings cushion for themselves. Three-quarters of non-prime borrowers don’t have any type of emergency savings fund, though 40% are expected to go through some sort of financial shock during the life of their loan, he says. “We’ve structured a program that assists borrowers in improving their overall personal balance sheet.”
Additionally, much like a home equity loan – which lets borrowers use the value of their home as collateral – the RateRewards program allows borrowers to pledge their auto title as collateral for a loan, which automatically cuts their interest cost by 20% each month. “Why shouldn’t a non-prime customer be allowed to leverage an asset for lower interest costs, just as prime customers do everyday?” says Carlson.
But changing consumer spending habits isn’t what Ascend has set out to do. “We don’t necessarily think this is about changing people’s behavior,” says Carlson. “This is a way for people who already have positive borrowing behaviors to be rewarded … consumers that may have had a one-off financial shock impact their credit score, for instance, but are now on the path to recovery.”
With help from the Financial Solutions Lab, Ascend has had the opportunity to connect with executives in the banking and lending world who are able to share their industry know-how with the company. “JPMorgan Chase has pulled out the red carpet for us. A company at our stage typically would not get anything like this,” says Carlson, who has also had the opportunity to work with a range of firms through FinLab, including behavioral economics firm ideas42 and legal counsel Bryan Cave.
With a strong group of investors, and a team with more than 150 years of non-prime lending experience, Ascend is ready to make some long-overdue changes to the lending market. “This has been a challenge people have known about since credit scores were introduced,” Carlson says. “Ascend is the only lender that empowers consumers to prove their actual, real-time financial health, reducing risk to Ascend while at the same time lowering their interest expense.”