Helping responsible lenders grow their loan books in difficult times

It’s hard to remember a time when lending was this difficult.

One pressure is the impact as 1.5m people leave fixed rate mortgages this year. They’ll spend an additional £19bn on mortgage repayments in 2024. Currently with higher credit scores, these ‘near-prime’ borrowers have been a priority for credit unions looking to balance loan books otherwise are dominated by smaller, riskier loans. However, now these households are struggling with affordability.

In 2023, 82% of loan applicants to community credit unions in Great Britain with a good or excellent credit score were accepted. In the first four months of 2024, this fell to 73%. For applicants across all credit scores declines have increased by 12%. In some credit unions the decline rate has doubled.

Despite these difficulties, or rather because of them, NestEgg continues to introduce new features, helping responsible lenders grow their loan books. Improving credit assessment and driving demand from lower risk applicants, is leading some NestEgg clients to experience growth rates close to 50%.

Improving credit assessment

• Recent searches

Applicants who have been applying for several loans in the last few months are more likely to be in financial difficulty. A high number of searches could indicate an applicant has been turned down multiple times. Flexible rules for NestEgg’s Decision Engine can be used to refer loans for manual assessment where a configurable number of searches have been made over a configurable period of time.

• Open Banking

For quicker credit assessment, NestEgg’s Decision Engine has new alerts that combine Open Banking and credit data. For example, a disposable income alert identifies when the loan repayment may not be affordable given other credit commitments. Checking average income and discretionary spending (Open Banking) and comparing this to the monthly value of credit commitments (Credit data) improves affordability assessment.

Soon users will be able to verify income and spot missed loan repayments before they appear on the credit file. New rules for Buy Now Pay Later and gambling are on their way.

Driving demand

• Soft credit checks

Using a full set of decisioning rules, soft credit checks are a way for people to see if they’d be accepted for a loan, before they apply. As a result, declines are identified at a lower cost without any impact on the applicant’s credit score. It’s a low-risk way for a borrower and lender to see if they’re compatible. With squeezed budgets, more people are wary of anything that will reduce their credit score (e.g. a hard credit check). This is especially the case if they are due to remortgage. Recent searches can impact on getting the best deals.

• Broker

NestEgg’s Broker Platform matches people who are actively looking for affordable loans with credit unions. NestEgg receives referrals from an increasing range of partners such as banks, housing providers and ‘problem spotters’ interested in promoting financial inclusion. We’re currently running a Proof of Concept with the Lloyds Banking Group, referring declined applications across the North West.

• Risk based pricing

Getting the balance between risk and reward is hard. Risk based pricing helps lenders better align products with their risk appetite. Loans advertised at 26.8% APR may be putting off lower risk borrowers. Conversely this can lead to higher risk applicants applying because they are used to paying higher rates (and will probably see 26.8% as a really good deal). As a result applications are riskier and the decline rate higher. Representative APR can be more attractive with more applications from lower risk borrowers as a result. Accept rates can be higher as risk is priced in.

Grow your loan book

Loans Officers can better spot people in financial difficulty. It’s easier to evaluate affordability risks before they appear on a credit file. Declines are quicker and lower cost. Soft credit checks and risk-based pricing lead to more applications. Together with referrals from the Broker Platform, credit unions can grow their loan books. Recent Decision Engine go-lives are seeing a doubling in applications.

Get in touch to book a demo today.