AI in Hire-Purchase Loan Business — A Focus on Thin File Models

Zan-Kai Chong
3 min readJul 5, 2023

Artificial Intelligence (AI) is revolutionizing various sectors, and the finance industry is no exception. One significant area that has particularly benefited from AI advancements is the hire-purchase loan business. In this context, AI’s essence can be distilled into two critical components:
- the application score (determining loan approval) and
- the collection score (guiding loan recovery).

However, challenges arise when applying these principles to the thin file model, i.e., cases where prospective borrowers have sparse credit histories. This minimal information makes it difficult to accurately evaluate their creditworthiness, often leading to a heavier reliance on the collection score even at the application stage. This article explores how AI can navigate these challenges and improve the efficacy of the hire-purchase loan business from a data science perspective.

AI and the Thin File Model
The thin file model presents an interesting challenge for financial institutions. Traditional credit scoring models are primarily designed to evaluate credit risk based on a prospective borrower’s financial history. When this information is limited, as in thin file cases, the predictive value of these models decreases. This is where AI, and more specifically machine learning (ML), can be valuable.

ML algorithms can be trained to find patterns in large, complex datasets. In the context of thin files, they can identify correlations and patterns that might not be apparent to human underwriters. They can leverage various types of data, such as transactional data, behavioral data, or even alternative data such as social media activity, to compensate for the lack of traditional credit data.

The Shift towards Collection Scores
Because the thin file model makes it challenging to generate reliable application scores, hire-purchase loan businesses often rely more heavily on collection scores. Collection scores aim to predict the probability of successful loan recovery from delinquent customers. They consider factors such as payment history, frequency of missed payments, and other behavioral characteristics to estimate the likelihood of loan repayment.

The use of AI in this context is two-fold. First, ML models can predict with a higher degree of accuracy which customers are likely to become delinquent. This information allows lenders to focus their collection efforts on high-risk customers and intervene early with these accounts. Second, ML can inform and optimize collection strategies. For instance, AI could suggest the best time to contact a customer or the most effective communication channel, thereby increasing the likelihood of successful loan recovery.

Refining the Process
The application of AI to the thin file model is not without its challenges. The use of alternative data sources raises privacy and ethical considerations that must be addressed. Furthermore, the accuracy of AI models depends on the quality of the data they are trained on. It’s essential to ensure that the data used to train these models is representative and free of bias.

Despite these challenges, AI presents an exciting opportunity to reshape the hire-purchase loan business. With careful design and implementation, ML models can compensate for the limitations of traditional credit scoring models in thin file cases. They can help lenders make more informed decisions, reduce credit risk, and optimize their collection strategies, thereby enhancing business performance.

While AI doesn’t provide a magic bullet for thin file models in the hire-purchase loan business, it offers a promising path forward. By blending traditional credit scoring approaches with ML-driven insights, lenders can make more nuanced risk assessments, even when traditional credit data is sparse. AI, therefore, is poised to play a central role in shaping the future of the hire-purchase loan business.