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Research Links Quick Access to Digital Loans to Higher Default Rates

Does Fast Access to Digital Loans Lead to Higher Default Rates?

Technology broadened the lending landscape, making it easier for previously underserved populations to receive money with a speediness that would be otherwise unimaginable were it not for digital channels of disbursement.

But in a market where default rates are high, there may be indications that easy and fast access to credit may be a factor — and slowing down the digital lending process may improve loan performance, and by extension, the financial health of borrowers.

In a paper titled “Too Fast, Too Furious? Digital Credit Delivery Speed and Repayment Rates,” economists Alfredo Burlando and Michael Kuhn of the University of Oregon and Silvia Prina of Northeastern University noted that digital loans exist as a “source of fast, short-term credit for millions of people.” The data focused on loans from an online digital lender based in Mexico, where the loan amounts were about $75 to $150, with repayment terms ranging from seven days to 30 days.

“Our [sample] estimate indicates that roughly doubling loan provision speed from 10 to 20 hours increased repayment by 6 percentage points,” the authors wrote. “This effect corresponds to a 21% reduction in the likelihood of default.”

“This finding naturally raises the question of whether regulating the speed of digital credit disbursement, such as by imposing a waiting period on loan delivery, would improve consumer welfare,” they added.

Targeting Faster Loan Disbursements

The movement toward faster loan disbursements is illustrated in PYMNTS coverage. A Money Mobility study in collaboration with Ingo Money found that 35% of consumers said they should be able to complete a loan application in less than two hours. The desire for speedier loans is not just evident on the part of consumers. The data showed that 66% of European small- to medium-sized businesses (SMBs) want access to faster credit; 55% of firms want to be funded within a week; and another 31% of smaller firms want to be funded within three days.

For the lenders themselves, the impetus is there to speed loan payments while maintaining and improving risk control via advanced technologies. As many as 76% of lenders are piloting or actively using artificial intelligence (AI) to optimize their loan portfolios and their risk assessment activities.

The desire for speedier credit comes as the world increasingly goes digital. In a continuing series on the transformation of everyday life along tech-underpinned channels, PYMNTS Intelligence found the number of consumers who participate in digital activities every day has increased by 6.5% from last year. In a nod to where digitally disbursed loans might end up, the study found that there has been 29% year-over-year growth in the use of Big Tech wallets — Apple Pay, Google Pay and Samsung Pay among them.