Multi-Borrower Loans Twice as Likely to Default, Study Says | Auto Finance News

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Contrary to the idea that more borrowers on a loan might reduce risk, one study reveals that two-borrower loans defaulted at more than twice the rate as single-borrower loans with the same FICO score.

This trend was found primarily with FICO scores higher than 700, Steve McCarthy, chief operating officer and co-founder of auto ABS data company Elicient, told Auto Finance News.

“This is a somewhat counter-intuitive result, and investors would be wise to follow this statistic more closely,” McCarthy said.

Especially in prime credit issuances, FICO score becomes a less important indicator for predicting default rates and paying more attention to factors such as multi-borrower trends could improve performance, he added.

The study attributes the trend to the way most issuers use the highest of the two scores when multi-borrowers apply for a loan.

“If two people go together to get a loan, and one FICO score is 700 and the second is 500 — even if the person with the 500 score is going to be the driver and responsible for it — they would say on the application that the primary applicant is going to be the 700,” McCarthy said.

While there is no “obvious” reason as to why loans with co-obligors seem to be underperforming loans without, one factor that could provide more clarity is the way in which issuers compute a single FICO score for multi-borrower loans.

Elicient breaks down the issuers into three shelves based on the way issuers compute a single FICO score for multi-borrower loans: an average of the two scores, primary borrower’s score, and the maximum of the two borrowers scores.

View Elicient’s full report by clicking here.

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Source : AutoFinanceNews