Payday Loans Present a New Market Opportunity

 In Credit score, digital loan

There was a time when the word “loans” referred to financial distress and was spoken of in whispers as it reflected your bad financial state. But aren’t we glad that we have moved past that time? Today, Indians are more and more open to taking loans as a better financial decision. Many of them are also opting for the faster and friendlier digital loans for that matter.

In Algo360, credit scoring is used for approval and rejection of applications. Consumers are classified into different sets according to types of loan like equated monthly instalment (EMI) or payday loans. Algo360 has introduced a new feature to generate credit score for payday loans. These are small, unsecured short-term loans that people borrow to get through the month until they receive the next pay cheque/amount.

In our recent market survey (Q3 2020‒21), we found that ~12% consumers are using payday loans, of which 67% consumers are below the age group of 30 while 44% consumers are taking loans of less than INR 5,000 amounts. This new and advanced credit scoring by Algo360 will ease the process for both the digital lenders and loan applicants.

What are the advantages of payday loans?

Payday loans can offer a safety net to those who live from month to month, and often find it difficult to cater to sudden expenses.

  1. Quick and easy: It is a fast loan, i.e., often approved and disbursed within minutes—without the hassle of lengthy waiting times.
  2. Minimum documentation and formalities: In most cases, the main requirement is to have a bank account and share some minimum personal and financial details. It does not require any extensive documentation like other loans.
  3. No credit check: Since these loans are availed often, no credit checks or collaterals are involved. Anyone can avail this loan irrespective of financial background.

We think there is a need to introduce a different credit score for payday loans because consumers who apply for these loans behave differently from consumers of other unsecured loans. Here we classified the consumers on the basis of the credit risk assessment, including:

  1. New enquiries
  2. Missed credit card/utility payments and reminders
  3. Transaction history
  4. Financial assets (investment)
  5. Income stability

The score is given in the range of Algo360 credit scores—from 0 to 360. Consumers with payday score of less than 240 are in the high-risk segment; those with a score of 240-270 are in the medium-risk segment and those with more than 270 are in the low-risk segment. The bottom 20% of customers are 4x riskier as a profile as compared to the top 20%.

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Credit risk assessment and stringent credit underwriting process are mandatory in this age where credit scores are failing for applying for digital loans over digital lending platforms.