Personal Loan Lenders May Now Ask For Even More Personal Information, And Here’s Why!

• Personal loans have traditionally been given out by lenders after checking an applicant’s credit history to verify their ability to repay the loan on time.
• Now, lenders are relying on more personal information to assess every application, some of which may raise privacy concerns among applicants.

A simple personal loan application only considered numbers such as an applicant’s credit history, regular income, or total net worth, to help lenders decide whether an applicant qualifies for a loan, or not.

Now, applicants may also be asked to provide information such as bank account details, work history, or even the major they opted for in college. All this is called alternative data – information that is not contained in an applicant’s credit report – and this information may soon play an important role in the loan approval decision-making process.

Is It Better To Include More Personal Information?

According to lenders, a credit report can only reveal so much about a particular applicant, and many times that information is not sufficient to make an accurate decision when approving or rejecting a loan application.

Many applicants may welcome this decision. The consideration of alternative data can drastically improve their chances of getting a personal loan, even if they have a poor credit history.

According to consumer advocacy groups, lenders may assess bank information pertaining to an applicant’s account and discover responsible behavior when it comes to handling personal finances. This is a positive sign and can help applicants that were previously unable to secure a loan because of a poor credit score to get approved.

But experts are worried that the use of alternative information may discriminate against those applicants who belong to specific races or belong to an economically marginalized community. This may also cause applications coming from lower- and middle-income backgrounds to be rejected.

For example, according to experts, there exist educational and occupational disparities between different groups of people. In the Bureau of Labor Statistics report released in 2018, it was revealed that 41% of all working white people and 54% of all working Asian people were employed in managerial or professional occupations. In contrast, only 31% of all working black people and 22% of all working Latinos occupied such positions.

Hence, it is being speculated that perhaps considering educational or occupational backgrounds in the loan approval process may increase financial disparities along racial lines.
In Practice

But Upstart, an online lending platform, is already asking for education and work backgrounds in addition to financial information on its loan application process. And, according to its CEO, Dave Girouard, the lender is working with regulatory authorities to ensure there is no bias in its loan approval process.

Upstart’s loan approval process was tested against traditional approval methods, and it was discovered that Upstart was almost two times more likely to approve applications with bad to fair credit scores compared to the traditional methods that based approval decisions mostly on financial information. The results of this test are available on the website of the Consumer Financial Protection Bureau.

Credit Scores Are Not Perfect Either

Even though there are concerns that alternative data may work against some racial groups, consumer advocates do recognize that the existing credit scoring system also has embedded disparities along racial lines due to economic factors that are beyond an individual’s control.

However, credit scores are still going to play an important role in the loan approval process. Many lenders will continue to set a baseline credit score that must be exceeded in order to qualify for a personal loan. But, the bank information will reveal more recent financial behavior, and help lenders decide whether an applicant is in a good position now to afford the loan.