Many non-bank lenders base their lending decisions on predictions about which applicants are likely to incur a First Payment Default (FPD)—that is, which applicants are likely to be late making their first payment on a loan. Lenders assume that by predicting FPD they will be able to predict which applicants are likely to default on the loans entirely, resulting in losses for the lender.
But our analysis of financial results at multiple non-bank lenders shows that FPD actually predicts account loss only about 50% of the time. When it comes to predicting whether a loan will be profitable, FPD turns out to be no more predictive than a coin toss.
In our analysis several non-bank lenders, we found that:
- For lenders with an FPD rate of 12%, FPDs occurred in about 50% of profitable accounts and 50% of accounts that resulted in losses.
- 26% of accounts that incurred an FPD turned out to be profitable.
What’s the lesson from this analysis? By focusing on profitability, rather than FPD, and leveraging the real-time data-driven insights from our AI Verify service, lenders can grow profits dramatically while keeping FPD rates under control.
To learn more about our analysis and the benefits of our AI Verify service for lenders, read our FPD white paper.