04 Feb Why immigrants are the most valuable asset class
Most U.S. citizens don’t witness the daily struggles of non-U.S. citizens and immigrants in getting access to credit when they move from other countries. This is even worse for people moving from developing countries such as India, Mexico, and China with limited to zero credit data in their home countries.
Most immigrants from developing countries don’t have a credit history in their home country.
In this post, we will discuss why these immigrants are a low-risk market and share our learnings from lending to 45+ countries.
Stilt has been lending to immigrants since 2015. We have now seen thousands of repayments and performance data from borrowers over the past 2+ years. We have done loans to international students, professionals, refugees, asylum applicants, DACA holders, and family members of immigrants.
Banks and lenders have denied credit to immigrants for decades because they don’t understand the risk. No data on immigrant credit performance is incorrectly considered as high risk. As we bring more transparency to this problem and prove lower risk for immigrants, our hope is that it will increase investments towards a solution.
Immigrants are one of the most valuable demographics in the U.S. and they are currently underserved by financial services industry.
A quick recap of why immigrants are low credit risk:
- Better educated — immigrants on average have a higher education level than the American population. Indians are the highest educated nationality in the U.S. More education also leads to more opportunities for work and higher incomes.
- Higher Income — immigrants earn higher than the median income of a U.S. household. They work harder to make a better life (that’s why moved to the U.S.) and as a result, they earn more. Median income of an immigrant household is 10% higher than the median income of an American household.
- Higher Savings Rate — immigrants save a significantly higher percentage of their income compared to an American household. They usually send money home every month (also the low-income workers). Their families are dependent on this money to put food on the table, pay their bills, and keep the heat on. Remittance from the U.S. to other countries is $120 Billion per year.
- Cultural factors — American citizens grow up in a credit dependent environment. They are comfortable with spending money on credit cards and carrying debt. But most immigrants from developing countries are less culturally disposed towards maxing out credit cards. They are less likely to revolve balance or have huge credit card debts. They are more likely to spend only what they have.
Even though immigrants have all these positive behaviors, investors are worried about one big systemic disadvantage — immigrants can leave the country in case of defaults (also called flight risk). The hypothesis is that immigrants leave the country without payments and there is no recourse to funds or financial penalty. Although the premise is true, data suggests otherwise. It is easy to forget that they worked really hard, spent a lot of money on applications, and went through a pretty long process to get a visa. The biggest reason to move to the U.S. is to make a better future for themselves — not for running away with a few thousand dollars (most of them will pay to stay in the country). Immigrants don’t just leave the country because they want to default.
The major reasons why immigrants leave the country and their correlation to credit risk:
- Family emergency: No correlation with credit risk — This is extremely infrequent, hard to predict, and a possible reason for a long stay at home. We have found someone leaving the country for family reasons has no correlation with their credit risk. It’s just an unfortunate situation. Low risk immigrants will still pay their dues or ask for a deferral until they move back.
- Planned return: No correlation with credit risk — They go back after a while to live close to their families or work in their family businesses. If people decide that they want to go back, they usually want to come back at a later stage in their life and keep their options open. Defaulting on their debts still stays on the credit report.
- Start a business back home: No correlation with credit risk — Most of these immigrants are highly qualified and were in the U.S. to gain work experience. If they see opportunities to go back home and start a business, they make sure they have enough funds to sustain themselves and keep their options open if something doesn’t work out.
- No employment: Correlation with credit risk — These immigrants go back to their home country because they are not able to find a job. This is the only case where going back is correlated with credit risk. If someone is not able to find a job even after completing education in the U.S. and thinks they won’t come back, they’ll want to take on a lot of debt and default on that. If we can identify immigrants who have a job or who will get a job, we’ll significantly reduce flight risk.
Given all the advantages and disadvantages of lending to immigrants, we want to share a sneak peek into our portfolio to show that immigrants are actually a lower risk population. We can charge them near prime rates with default levels of super-prime customers. This is a good arbitrage for investors.
Stilt lends to these immigrant students and working professionals with limited FICO. They have better performance than 720+ FICO borrowers on other platforms.
Below are some highlights of our current portfolio:
- How old are the borrowers?
- How much do borrowers make annually?
- What is the education level of borrowers?
- How do Stilt borrowers compare to Lending Club borrowers?
We strongly believe that immigrants are not treated fairly by U.S. banks and existing lenders. There is a significant mismatch in demand and supply of credit products for them. They deserve better financial services. Even though immigrants are lower risk, they are charged deep subprime rates because of a myopic view of credit risk.
Our goal with Stilt is to build a financial services company that treats immigrants fairly and help them build a better life in the U.S.
We will share our portfolio performance is to bring transparency to their credit quality.
We are on our way there!
Stilt provides loans to international students and working professionals in the U.S. (F-1, OPT, H-1B, O-1, L-1, TN visa holders) at rates lower than any other lender. Stilt is committed to helping immigrants build a better financial future.
We take a holistic underwriting approach to determine your interest rates and make sure you get the lowest rate possible.