Author Topic: Borrower requests more $ for Credit Card Payoff loan than their RCB  (Read 776 times)

JimGasperini

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Pardon me if this has been asked before, but I could not find any mention.

I'm looking at a borrower with a Revolving Credit Balance of about $8K. They request a loan of $15K for Credit Card Payoff.
How does this make sense? It would seem they are obviously requesting a loan for $7K worth of something else. Or am I misunderstanding what these terms mean?
Thanks

Fred93

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Re: Borrower requests more $ for Credit Card Payoff loan than their RCB
« Reply #1 on: January 16, 2020, 08:32:30 AM »
Pardon me if this has been asked before, but I could not find any mention.

I'm looking at a borrower with a Revolving Credit Balance of about $8K. They request a loan of $15K for Credit Card Payoff.
How does this make sense? It would seem they are obviously requesting a loan for $7K worth of something else. Or am I misunderstanding what these terms mean?

You understand, and you've hit on a valuable concept, tho things are not always cut & dried, ie these aren't precise concepts.

LC pulls credit info from one credit reporting agency.  Every credit card company does not report to every credit reporting agency.  Therefore you can never be sure that the info from the credit reporting agency includes every card.  Etc.

Also, when someone clicks the "credit card payoff" box, they may not be interpreting that to mean "credit card payoff and NOTHING ELSE".  Maybe he's also thinkin' about the $5k he owes his bookie.  In other words, these concepts are a bit fuzzy, so a bit of mismatch doesn't mean the guy is being intentionally dishonest.  Maybe it's an indication of sloppy thinking, or just imprecise planning.

However, many lenders use the comparison that you are making, and it has been shown to have value. 

If you work with the historical data, you can see that folks who borrow an amount close to their revolving balance have a lower default rate than folks where those numbers mismatch.  You can download the data yourself and write software to examine statistics such as this, or you can use www.nsrplatform.com to do the work.  It takes a bit of work to make nsrplatform do this test, as you have to define a "formula".  I defined a formula which was balance divided by loan amount.  After you do that you can plot variables such as return or default rate vs this ratio.

In the end, if it has value in a statistical sense, then it is something reasonable for lenders to use, even if the concepts are fuzzy.

Even tho I've studied this criteria, and know it has value, I don't use it.  My problem is that my other criteria are such that I have trouble finding enough loans, so adding this criteria would restrict my selection too much.

rawraw

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Re: Borrower requests more $ for Credit Card Payoff loan than their RCB
« Reply #2 on: January 16, 2020, 05:41:35 PM »
How do you determine feature importance Fred?

JimGasperini

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Re: Borrower requests more $ for Credit Card Payoff loan than their RCB
« Reply #3 on: January 17, 2020, 01:21:34 PM »
Thanks, Fred93. I had suspected that borrowers with such a discrepancy might be less trustworthy than others; it's interesting to know that stats back that up.

lctz

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Re: Borrower requests more $ for Credit Card Payoff loan than their RCB
« Reply #4 on: March 04, 2020, 03:50:40 PM »
It depends on interest rates.  If LC rating model considers the effect; it might charge higher interest rates to compensate the risk.  You can look at historical data to see if this population has higher interest rates comparing to similar rated loans.