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Lending risk analysis is more important than ever, with lenders walking a fine line between accepting new lease or loan applications and minimizing potential defaults. However, innovations in lending technology are helping to minimize lease or loan origination risk, as well as portfolio risk.

An increase in the number of reliable data sources that provide information on consumer spending and financial strength—coupled with increasingly sophisticated evaluation algorithms—allow lenders to more efficiently and accurately evaluate lending risk. Lending solutions with natively integrated analytics enable lenders to assess portfolio risk and proactively take steps to reduce write-offs. 

Here, we explain how these capabilities have become essential tools for lending risk analysis.

A Better Understanding of Financial Standing

Lease or loan applicants with excellent credit scores breeze through the origination process. With automation driven by decision rules, applicants are offered the best terms within seconds of receiving the application. However, credit scores are not always a true indicator of current financial standing. Trended credit data, in combination with bureau scores, can bring some additional perspective in assessing creditworthiness. 

Trended credit data reports, available from providers like TransUnion, offer up to 30 months of credit card data with details regarding credit limits, monthly balances, minimum, actual, and late payments, and amounts past due. A bureau score is a snapshot of an applicant’s financial standing. Trended credit can reveal changing financial situations as described in this table.

Credit Score Trending Credit Data

Lending Risk Analysis

Excellent (740+) 
  • During the past 6 months, monthly balance increased an average of $720.
  • Borrower pays a minimum due each month. 
  • Recent payments contrast starkly with prior 12 months where monthly balances were paid in full.
Applicant is facing cash flow problems, indicating greater risk than suggested by credit score.

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Acceptable (620-680)
  • Recent 6 months of credit data counter the dismal national trend.  
  • Applicant added a new credit card. 
  • Monthly balances increased an average of $345. 
  • Cardholder pays the full monthly balance.
Improving financial position. Lower risk than indicated by the credit score and deserving of better terms.

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Subprime (550-620)
  • 6 months of credit payments indicate missed payments in the past 2 months. 
Higher-risk applicant than indicated by credit score. Most likely an auto-decline.

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Incorporating trended credit data into your lease or loan origination process may require some custom integration, especially for lenders using older lending software. Modern, cloud-based solutions make this task considerably easier with pre-integration of trended credit data services.

Machine Learning Approach to Lending Risk Analysis

With fewer lease or loan applications and increased risk due to the current economic climate, lenders need a credit model that thoroughly evaluates credentials and recommends terms without increasing lenders’ risk. Machine learning techniques are helping lenders more accurately assess financial standing and offer risk-adjusted terms for qualified borrowers. 

Through analysis of thousands of data variables obtained from loan or lease applications, consumer financial records, and lender’s portfolio, machine learning algorithms develop a single, dynamic credit model. This approach to lending risk analysis reduces operational costs and gives lenders a competitive advantage over those who only employ traditional credit models. 

Integrated Analytics for Portfolio Risk Insight

Ideally, lenders want to minimize risk at lease or loan origination, but invariably a percentage will become delinquent because of unforeseen circumstances. Rather than accepting this as inevitable, lenders can employ analytics to gain a better understanding of their portfolio and sources of risk. 

Careful portfolio analysis can reveal attributes that closely correlate with the likelihood of default. Using this insight, lenders can reduce the chances of future defaults by identifying leases or loans with similar characteristics, carefully monitoring payment trends, and proactively contacting customers to offer loan or lease modifications to help bridge financially challenging times. 

Now May Be the Best Time to Take Advantage of Technology Innovations 

From an investment perspective, the quantitative improvements in lending risk analysis provided by trended data, machine learning, and integrated analytics are considered essential tools of the lending industry, making this the perfect time to invest in loan origination technology. It can help reduce write-offs in the present and help improve a lender’s risk management well into the future. 

Getting Started

defi SOLUTIONS provides configurable loan or lease origination systems, lease or loan management and servicing, analytics, and a wide range of technology-enabled BPO services. If you’re looking for more efficient and accurate approaches to lending risk analysis, we’d welcome the opportunity to discuss your requirements. Contact our team today or register for a demo.

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