Multi-Borrower Loans Twice as Likely to Default, Study Says

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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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As Associate Editor of Auto Finance News, Nicole Casperson reports on the latest news, trends, and innovations impacting the auto finance space. Nicole is an experienced business reporter from Texas, and she previously specialized covering the housing and mortgage industry. Nicole received her Master of Arts in Mass Communication and her Bachelor of Arts in Journalism both from the College of Media & Communication, Texas Tech University.