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Segment of Population Using Alternative Loans May Perform Well on Traditional Credit Products

TransUnion’s newest study reveals trends in the alternative loan market

Two-thirds of consumers active in the alternative loan market fall in the subprime risk category, the riskiest of all credit tiers. Yet, a new TransUnion (NYSE: TRU) study found that many of these consumers perform well when opening traditional credit products such as credit cards, auto and personal loans.

Alternative loans are one of the largest categories of credit obligations not reflected in the traditional credit file. These often include short-term loans, short-term installment loans, virtual rent-to-own (or point-of-sale finance) and auto title loans. The risk distribution of this segment is much different from the overall population: approximately 66% of the population found in TransUnion’s alternative lending database is in the subprime risk group (those consumers with a VantageScore 3.0 credit score of 300 to 600) whereas the overall population stands at 25%.

“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.”

TransUnion studied over five million consumers who originated a traditional credit product between Q2 2015 and Q1 2016 and measured their performance 12 months after originating the loan. Of the over five million consumers, approximately 450,000 (or 8%) were present in TransUnion’s alternative lending database. TransUnion then compared the performance of the alternative loan population to those consumers who were not seeking or did not possess an alternative loan product.

The study corroborated that many alternative loan borrowers do present greater risks on traditional loans. However, there is a material subset of this population that would present reasonable risks on an auto loan or credit card, among other traditional products.

“This is a great financial inclusion story, as the study identifies various metrics that can help lenders differentiate higher risk consumers from lower risk using alternative loan data, and thereby extend credit where they may not have previously,” said Liz Pagel, co-author of the study and vice president in TransUnion’s financial services business unit. “For example, one finding is that consumers who have used alternative loans multiple times as a regular part of their financial management strategy have a significantly lower probability of delinquency on a traditional credit product.”

The study found that consumers who utilize short-term loan products as a regular part of their financial management strategy appear to manage all debt more responsibly.

For instance, in the near prime risk tier (consumers with a VantageScore 3.0 credit score of 601-660):

  • Approximately 14% of those borrowers who possessed only one short-term loan went 90 or more days past due on a traditional account 12 months later.
  • The delinquency level declined to less than 12% when a consumer possessed two alternative loans.
  • The delinquency figure dropped even further to around 9% when a consumer had eight or more alternative loans over the course of seven years.

The study also found that consumers in the near prime risk tier with more satisfactory alternative loans also performed better on traditional loans than those who had fewer.

Near Prime Consumers with Strong Alternative Loan Payment History

Perform Better on Traditional Loans

Number of Satisfactory Alternative Loan Accounts









Ever 90+ Days Past Due in 12 Months on Traditional Loans









While there are clear benefits of extending traditional credit to some alternative loan borrowers, the study also highlighted that the majority of alternative loan consumers present greater risks than the general population. When comparing consumers with alternative loans to those without, borrowers with alternative loans are more likely to go delinquent on traditional products.

Comparing Origination Activity of Alternative Loan Borrowers to the Rest of the Population

TransUnion’s study found that borrowers in the alternative lending database have a greater preference for personal loans and auto loans in comparison to consumers who are not in the alternative loan database. Approximately 26% of alternative loan borrowers who originated a traditional loan product in the study opened an auto loan and 50% took out either a personal loan or auto loan. This latter statistic compares favorably to the 37% origination rate for the rest of the population in the study.

From a supply perspective, traditional finance companies are providing by far the most loans to alternative lending consumers, with a market share of 59%. However, credit unions (9%) and FinTechs (3%) supply about 12% of such loans to this credit population.

“As with all credit data, it’s imperative to dive deeper and employ a thoughtful analytical approach when evaluating consumers with alternative loans,” added Komos. “If done right, lenders can gain broader insights and hence a better ability to identify and quantify risks, which in turn allows them to grant credit more widely and with greater confidence. In that way the whole market wins.”

For more information about TransUnion’s alternative data study, please click here. Consumers interested in learning more about their credit performance and credit education information, can visit

About TransUnion (NYSE:TRU)

Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.

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