Could alternative lenders free up the credit markets?

Since the last recession began, the market for credit has become much tighter. While some may argue that this is a good way to prevent irresponsible borrowers from running up the high levels of debt that worsened the downturn, the fact remains that consumers and businesses still need access to credit in good times and in bad. Without it, they will have a difficult time investing in their future well-being.

And so, if banks cannot offer the credit that some of these borrowers need, they will seek out other avenues.

As a recent article on Bloomberg Businessweek points out, several alternative lending startups are trying to plug the gap. For example, there is FreedomPlus, which has offered loans of up to $35,000 to consumers with poor credit. 

How can it do this? The lender, which is funded by $125 million from the Vulcan Capital investment group, claims that it can predict whose scores will rise. It appears to have the track record to back up this claim. According to the news source, FreedomPlus lent out $25 million during a five-year pilot to consumers with FICO scores averaging 576. The company reported that only two percent defaulted.

"It's the largest commitment from an individual investor that I've ever seen in this space," Peter Renton, of Lend Academy, told the news source.

If other alternative lending sources can take advantage of big data to make bets like these, then we may be poised for a complete overhaul in the way the lending business works. Risk assessment software could help many of these startups make wise bets with their capital.

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