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The alternative loan market is popular with people looking for financing, and two-thirds of people in this market fall into the subprime category, which means they come with a higher level of risk. But according to a new study by TransUnion, they might not be a risky bet after all. Many subprime consumers are doing really well when they go for more traditional credit products, whether that is credit cards, auto loans or personal loans.
Alternative loans are not typically included in your credit file, but it is a very large category of products, which include everything from short-term loans and auto title loans to virtual rent-to-own (point-of-sale finance) loans. This group is very different than the average population when it comes to their credit rating, with 66% falling in the subprime risk group. Meaning those people have a VantageScore 3.0 credit score falling in the 300† to 600† range, compared to the general population where they make up just 25%.
Subprime borrowers take care of business
In the study, TransUnion looked at data from five million consumers who had applied for a traditional credit product between the second quarter of 2015 and the first quarter of 2016. They then studied their history once they received the loan.
Also, it's important to note that just about 450,000 of the 5 million were actively in TransUnion's alternative lending database. Using this data they compared the performance of people in the alternative lending arena with those who did not have this type of loan in their portfolio.
While they did find that many of alternative loan borrowers were riskier when it came to payment and performance, they also found that there is a segment of this market that represented an acceptable level of risk when it came to getting a credit card or auto loan.
A new pool for lenders
TransUnion's research found that lenders may want to take a closer look at this group and perhaps start doing business with them. "Alternative loans are often utilized by consumers who need money fast or have no other avenues to secure a loan. The majority of these consumers are among the riskiest, from a traditional credit score perspective, but those who maintain satisfactory payment status on alternative loans can, in fact, present acceptable risks on traditional credit products," said Matt Komos, TransUnion's vice president of research and consulting.
"Our research indicates that lenders may benefit by conducting business with this subset of the population, a group they might otherwise not be targeting with credit offers. This is good news for alternative lending borrowers, as many of these consumers do seek opportunities to gain greater access to traditional credit products and build their credit profiles," he added.