Traditional Application Intake Form Ignores Loan Amount

Credit applications typically don’t ask for one of the most important questions during the data intake process, the loan amount. Lenders either think that value is not important or the system they employ to make decisions is not capable of digesting this information.

When lenders fail to obtain this information, they are missing an opportunity to get to know their applicants on a deeper level. When this information is not captured, lenders won’t know whether their product actually meets the needs of the applicant.

Perhaps the lender is jaded that all of their applicants want the maximum allowed or type in all “9”s in the field, or they believe that it might scare away potential applicants if they show the maximum allowed loan amount is less than the applicant’s expectations. Regardless of the psychology that goes behind not capturing this data, we failed to capture one of the most important elements of a credit application.

We will talk about various ways to capture this information and how to leverage this information to maximize conversion and reduce risk for lenders.

Various Ways to Capture “Request Loan Amount”

As we evolve from willfully ignoring this piece of information to collecting this information, we have arrived at a commonly seen field in more modern applications, called “Request Loan Amount.” This is a big step forward. Let’s see what we can do with this information.

For one, and it goes without saying, we know what the applicant is looking for. Let’s say the customer is looking for a $10,000 personal loan and we captured this information. We can immediately assess whether this person qualifies for the loan programs you have to offer.

One may argue that the lender should immediately tell the borrower that whatever they have to offer doesn’t fit what the applicant is asking for. This could either be a polite decline page or a form validation error message “the red message” below that field. Neither one of these actions is awkward and could potentially hurt the lender’s business by stopping the application process right there and then.

The more advisable approach would be to take in the information in consideration and in context and move on with the application process. The lender may have to spend a few bucks to verify identity and pull the applicant’s credit profile, but doing this might increase your application conversion rate, and here’s why.

The consumer in this case may have stated that he or she wants $10,000, but in reality, he or she may not need as much as $10,000 and that $6,000 might do the trick. Some, not all, consumers will ask for more than what they need, fearing that they won’t get what they want while maintaining the flexibility of getting a little bit more than what they need if approved.

Equipped with that knowledge, the lender’s credit decision engine keeps on churning. Let’s say that the decision engine and the pricing engine went through the applicant’s data, income stream, and credit reports, and the resulting decision is to offer him or her $8,000. The lender and the LOS (Loan Origination System) should immediately let the applicant know that they have been approved for $8,000, even though it wasn’t what this applicant asked for originally.

The lender has two choices here, completely ignore what the applicant asked for and stick with their landing or say that they know that the applicant was asking for $10,000 but the system returned $8,000 and use choice words to let the customer know that they’ve been heard and also tell them that the $8,000 is the responsible way given their income and credit situation. Perhaps once the relationship is established with this borrower, the ongoing repayment experience can be leveraged for the next loan and meet the customer expectation next time.

Balancing Risk and Conversion

Perhaps the next example speaks volumes to the risk managers in our audience. We can start with the same example, but this time the applicant is only asking for $5,000 and the decision engine and pricing engine returned the same $8,000 offer (internally).

The lender and the Loan Origination System (LOS) have a few choices to make. First, the lender could show the borrower the maximum approved amount of $8,000, given that the client only asked for $5,000.

This might be a very “customer friendly” thing to do, but we have some credit risk considerations. Perhaps the applicant doesn’t need more than $5,000 and perhaps there are things in his or her life that lead the applicant to believe that they can only take on the repayment with respect to a $5,000 loan. Either way, the more prudent thing to do is to offer whatever the customer asked for, which is $5,000, even though the lender’s decision engine returned $8,000.

This decision is often fought in the boardroom between the Chief Marketing Officer and the Chief Risk Officer. Most often the decision lies somewhere in between. If the machine or the credit decision engine returns more than what the customer asks for, display what they asked for plus 10 or 20 percent above what they’ve asked for.

With a simple ask of “Requested Loan Amount,” the lender can understand the customer better and risk managers can control credit risk better. The answer to this question on the credit application simply doesn’t exist in anyone’s credit risk model, and we believe that this information is so valuable that lenders need to take it into consideration and use it accordingly.

Evolution of the “Request Loan Amount” Field

In a term loan, there are other aspects of the loan term, namely duration and repayment amount.

The duration of the loan is how long the loan’s repayment period lasts. In traditional mortgage loans, the duration of the loans could be 20, 30, or even more than 30 years long. In auto loans, we’ve seen 50 to 70 months being offered to consumers in the United States.

In short term installment loans, we’ve seen durations go anywhere from a few weeks to just a handful of years. The duration of the loan is highly dependent on the loan amount. The biggest reason for this correlation is affordability. The larger the loan amount, there should be a correspondingly longer duration.

For example, if the loan is $10,000 and assuming this is a zero-interest loan, the loan repayment amount could be $1,666 per month for a six-month duration or $833 per month for a 12-month duration loan or $416 per month for a 24-month repayment period.

Each of these scenarios could have a varied and large impact on a household’s total debt load and monthly obligations. Some borrowers may have the financial capacity to repay the $1,666 monthly payment to take advantage of the short duration and get out of debt faster.

Most of us might be more comfortable with the 24-month repayment period with a $416 monthly payment amount. That’s a more manageable repayment amount for most Americans. So the question is, should we also ask the applicant what they are comfortable with paying on a monthly basis?

In addition to the monthly repayment amount, should we also ask for the duration of the loan repayment period that the consumer is comfortable with as well? And how do we deal with the correlative effect and especially user experience on a mobile device if we let the consumer decide on these factors that drive other factors?

Introducing “Sizer,” the Most Flexible Loan Term Builder

When we go shopping for cars, the car salesperson lets you kick the tires and perhaps lets you take a test drive around the block. Once a decision is made on the make, model, and perhaps color of the vehicle, they often hand you over to the finance department to go over your options.

Most of the time, the finance manager doesn’t talk about the overall pricing of the vehicle to avoid haggling or sticker shock after all the taxes and fees are added in. The finance manager often asks you a question of what you are comfortable with as a monthly payment.

This is a sales tactic that distracts the buyer from thinking about the big hefty price tag and redirects their thoughts to affordability. What’s happening here is that the finance manager is running a “Sizer” in his or her head.

If you say that you want the monthly payment amount to be below $500, the finance manager is “sliding” that scale in his or her head to a longer duration loan term, perhaps a 60 or 70-month repayment period to reduce the monthly payment down below $500.

If you want to keep the monthly payment below $200 per month, he might redirect you back to the lot and start looking at used vehicles. Regardless of the scenario being played out at the car dealership, this “sizing” activity is happening in real time.

LendAPI is now putting the power in the hands of either the applicant or the lender by introducing “Sizer” as part of our Loan Originations System Builder, previously known as our Product Builder.

The “Sizer” lets you slide across various components of a loan and it is interactive. You can set it as a free sliding scale or a stepping function. We’ve implemented all of the flexible configurations into the LOS builder’s widget setting for you to configure it however you like.

The “Sizer” widget is available today. You can try it at www.lendapi.com with our no-obligation 14-day free trial.

About LendAPI

LendAPI is a super-orchestration platform that helps banks, fintechs and retailers to launch embedded finance products instantly. Start a free trial at www.lendapi.com. Follow us on Linkedin, X, YouTube and our Weekly Newsletter with our Marketplace Slack Community.