For those in the business of lending money, approving loans to less than creditworthy consumers can seem like an exercise in futility – and a great way to see their profits evaporate. Even after more than a decade of economic recovery, the dark shadow of the 2008 housing crisis in conjunction with the variability of COVID-19 still loom large. Because of this, many lenders are hesitant to move forward with subprime applicants. However, despite these uncertain times, there is plenty of money to be made in subprime lending. Here’s how your business can capitalize on this underserved market.
Hard Swing of The 2008 Housing Crisis
In the wake of the 2008 housing crisis and subsequent collapse, many lenders swung hard in the other direction – refusing to loan even small amounts of money to those with less than exemplary credit. As a result, many subprime lenders, who previously found it quite easy to take out car loans and qualify for mortgages, found themselves shut out of the market.
The hard swing to credit quality and the resulting reluctance of lenders to write loans for those with poor credit created a number of serious challenges for would-be borrowers. Additionally, these changes also created some interesting opportunities for those in the financial community. Yet until recently, those opportunities have gone largely untapped. Consequently, financial professionals are leaving millions of dollars on the table and an entire portion of the borrowing public with few good options.
The Underserved Subprime Lending Market
Despite the devastation of the 2008 housing crisis, many subprime borrowers were willing and able to make their monthly payments. But without anyone to lend to them, they simply went on their way, driving their old cars, writing rent checks, and wondering when they would be able to claim their share of the American dream.
This underserved marketplace has been unfair for would-be borrowers, but it has been just as challenging for financial professionals who are willing to take the risks and serve the needs of the not so creditworthy. The subprime lending market is alive and well. In fact, there are many unique advantages for lenders who are willing and ready to take part in it.
Higher Risk, Greater Reward
In the financial industry, the willingness to accept a higher level of risk carries with it the possibility of a greater reward. That is true in the stock market, and it is true in the world of subprime lending as well.
Because of their less than stellar credit, subprime borrowers are forced to pay higher interest rates, and that can mean higher profits for the financial institutions underwriting the loans. But how do you tell which subprime borrowers are creditworthy and which are not? The answer requires more than a superficial glance at a credit score.
Many Credit Scores are Artificially Low
The widespread belief that subprime borrowers are inherently unworthy and unlikely to pay back money is a common, but often erroneous, belief. Lenders rely on credit scores and credit reporting agencies to provide accurate information, yet in all too many cases, the data they receive is deeply flawed.
Independent studies into the accuracy of credit reports have uncovered some troubling inconsistencies and inaccuracies, calling the entire system into question and redefining what subprime even means in the digital age.
How Inaccurate Credit Reports Impact Subprime Lending
Far from achieving their goals of near 100% accuracy, research has found that four in five credit reports studied contained at least one error. Sometimes these mistakes were trivial, like the misspelling of a street name. But other times, these inaccuracies are far more consequential, like a paid-off account still appearing open or reports of a late payment that was actually made on time.
What this means for lenders is that the information they are receiving is likely to be incomplete at best. Relying on credit scores alone is like trying to make lending decisions with one hand tied behind their back, but the good news is there is another way.
If you want to take advantage of the benefits of subprime lending without taking on an inordinate amount of risk, technology can come to your rescue. With a simple piece of software, you can offer your subprime clients the online tools to dispute errors and improve their credit. Most importantly, software applications like ScoreShuttle, keep you connected to these once lost leads and send you an alert the minute they reach the credit level you require to confidently make a deal. This feature allows your business to potentially turn credit-based denials into fruitful approvals – earning additional profits for your organization.
The financial world has been turned on its head, first by a wave of subprime lending and questionable mortgages in 2008, then by a virtual lockdown in the subprime market. As the industry struggles to find a middle way, it has created enormous opportunities for savvy business owners willing to serve the underserved niche. Now is the time to make your move, and with technology at your side, the rewards can greatly outweigh the risks.
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