How online mini-credit algorithms work
Unlike in the past, calculations are made automatically , using computers, which receive the information of the customer profile and process it with the previously defined algorithm.
The result is well known: loans approved immediately , the amount of which reaches the applicant’s account in a matter of minutes. Now, what are the algorithms of mini-credit entities and how do they work?
What are the types of algorithms used by credit institutions
The fundamental calculation carried out by all credit institutions -including those that grant microloans- is Credit Scoring , a kind of credit risk level score that each client presents.
However, little by little new alternatives are emerging based on different concepts, such as reputation in social networks.
How does the Credit Scoring work?
The Credit Scoring is a scoring or qualification system, whose calculation is carried out an analysis of the economic data and the credit history of the individual requesting a loan .
The result is a percentage that expresses the solvency level of the prospective client and, in short, the probability that he will repay the loan under the agreed conditions or fails to make the payments at any given time.
The minicredit entities establish a threshold from which they are willing to grant credit or not. The level of risk tolerance that they assume is an internal decision. In any case, all those applicants whose Credit Scoring exceeds the established threshold will receive the approval of the requested loan . Otherwise, the loan will be denied or the request discarded.
How does the Big Data Scoring work?
The Big Data Scoring is a new approach when it comes to calculating the financial risk of loan applicants. Instead of being limited to the previous credit history and the usual economic information, we proceed to a much more global analysis of the person’s profile , through the collection of information presented on the Internet.
One of the main exponents of this new trend is the analysis based on the information present in social networks. The new Big Data algorithms analyze the contacts, interactions and multitude of content published and shared in social networks by the loan applicant.
It is from this information, how a credit risk score is determined, which determines the probabilities that the applicant will comply with the loan or not. Without a doubt this is a very novel approach that can work as a perfect complement and even substitute for traditional Credit Scoring.
What are the advantages of using algorithms for clients?
The use of these advanced algorithms has allowed the minicredit entities to dispense with the usual procedures that traditional banking usually submits to the client.
Obviously, this is in favor of the user experience of the client, since this one:
- They no longer have to go to a physical office to make inquiries and procedures to apply for a loan.
- You no longer need to comply with an incessant paperwork, through which personal financial information is collected.
- You can apply for the loan from the comfort and privacy of your own home.
In short, the new algorithms used by mini-credit entities have been a revolution in the financial field and have opened the door for many other entities to start offering financing services in a much safer and more agile way than some years ago.