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The Role Social Media Can Play in Getting a Loan

Up until recently, loan seekers without a credit history have been unable to be considered anything but high-risk by lenders, resulting in an offer of loans at significantly higher rates, if not denying the applicant all together. However, social media may now be offering a solution to this problem. Alternative credit providers are increasingly looking at social media presence as an indication of an applicant's trustworthiness and reliability. Through the application of algorithms to search through social media sites such as Twitter and Facebook, small financial firms are able to make predictions of an individual's lifestyle and dependability; thereby distinguishing trustworthy borrowers from those deemed likely to default on their repayments. Lenders can subsequently price their loans more fairly and cater to a group of people that have previously been excluded.

How is Creditworthiness Determined?

LendUp, a San Francisco based start-up, looks at social media interactions to determine whether information provided on a loan application corresponds to the information that can be inferred from social media postings. Candidates share their Twitter and Facebook pages, along with other relevant sites, in order for the startup to verify identities and gain an understanding of the individual in question. LendUp is certain that this method is more accurate and useful in assessing potential lending risks than the traditional method of looking at credit scores. However, social media interactions is not the only indicator financial firms consider when screening applicants online. Payday-lending company, Wonga, even looks at the time of day an applicant views their site when determining his or her reliability. German Kreditch examines over 8,000 indicators, culminating in an overall candidate score to determine whether to make a loan offer or not. This assessment considers factors such as the number of likes an applicant receives on Facebook, time spent browsing online, and apps installed on their phones, among many others. Since its creation three years ago, the company has handled over 250,000 applications – an indication of its success.

Alternative Strategies and Peer Pressure

In some cases, social media can even be a channel through which pressure is exerted on applicants to ensure payments. Set up by Jeff Stewart in 2011, Lenddo had the aim of providing an opportunity for those new to the Filipino middle-class to access loans. With close to a million users internationally, Lenddo appears to have a clear upper hand in the global market. The company employs a standard method of mining through data available online to determine how members communicate with others, and proceeds to transform this into a personal overall score. However, in some cases members are asked to choose a group of "trusted friends" who will take on the role of references. These friends will be alerted when the applicant is successful in repaying their loan, should they choose to support the candidate in question. When problems with repayments have existed, Lenddo has even been known to threaten to alert the trusted friends in an attempt to exert great peer pressure on the applicant.

No Social Media Presence? No Despair!

Of course, many potential applicants may not have a social media presence or be in possession of a smartphone. In such cases financial firms may look towards activity on a simple cellphone to determine creditworthiness. Kenya's most successful mobile operator, Safaricom, examines daily communication behavior of its applicants by investigating how often airtime is topped up, how often calls are made, as well as how often customers use the mobile money function in order to make an assessment of the individual. This is a technique also employed by UK-based startup Cignifi, who looks specifically at the length of phone calls together with the location of the caller to make lifestyle predictions and, in turn, determine the trustworthiness of the loan applicant. It is suggested therefore that even communication through a simple cellphone can be sufficient as an indicator of repayment reliability.

A Concept That is Likely to Spread

The companies developing this form of assessment generally lend to applicants with less than ideal credit scores or those without own bank accounts. The aforementioned strategies are premised on the notion that traditional methods of creditworthiness assessments are flawed. Traditional methods incorporate too few factors and do not give a holistic picture of the individual, consequently excluding loan-worthy applicants. The incorporation of social media aims to fix this flaw and enable lenders to provide better loan terms to those who deserve it. Due to Lenddo's great success, the company has halted its lending in preference of selling its algorithm to other financial firms assessing loan candidates. Although larger financial institutions have not joined the social media trend just yet, it is probably only a matter of time. Your social media interaction will most likely be of higher importance in the future, for company growth as well as for company creditworthiness. It may therefore be wise considering what your social media activity reveals about you and how to tweak this to work in your advantage.