What is second-look financing? Expand lending with more data

Traditionally, credit scores were the main tool that lenders used to determine loan risk. Lenders want to see that a borrower can responsibly manage debt and make on-time payments before extending credit. However, this creates a catch-22—if someone has never borrowed before, they can't prove their ability to make on-time payments.

Over-reliance on traditional credit scores also makes it difficult for borrowers with economic challenges to rebuild credit, excluding many consumers from essential financing. Nearly 32 million Americans are considered "unscorable," meaning they have rarely borrowed money or don’t have a credit score, while many U.S. consumers have credit scores that are considered “subprime”. This means millions of Americans can’t borrow money for purchases like a reliable car, home repairs, or other everyday needs. 

Second-look financing, which considers additional data outside of credit scores, is changing the game by giving those without credit history a “second chance” to qualify for credit. Ultimately, it provides more consumers with access to credit and more potential customers for lenders.

What is second-look financing?

Second-look financing is a lending process that offers borrowers with low or limited credit history a second chance at obtaining a loan based on a more holistic view of their finances using alternative data. For lenders, it’s a prudent way to weave alternative data sources, such as cash flow information, into their lending strategies to supplement traditional credit data.

What data does second-look financing use?

Second-look underwriting draws on different types of cash flow data:

• Income and asset verification. Recurring direct deposits, payroll patterns, and self-employment deposit frequency show how reliably a borrower earns. Plaid Income identifies payroll income, gig earnings, and government benefits and distinguishes between them. 

• Balance stability. Average daily balance, minimum balance over 90 days, and overdraft frequency all factor in. A borrower who stays positive and rarely overdrafts shows financial stability that a traditional credit score doesn't capture.

• Debt-to-income from transactions. Loan payments, rent, and recurring obligations in transaction data produce a debt-to-income figure based on current obligations, not just what's on file with the bureaus.

• Payment behavior. Whether a borrower pays recurring bills like utilities, subscriptions, and insurance on time using their bank account is one of the strongest behavioral signals a lender looks at.

Plaid Check, Plaid's consumer reporting agency, turns all of this account data into a risk score built for underwriting decisions. Powered by LendScore, the score can help reduce risk by 20% for some subprime and near-prime borrowers. 

How does second-look financing work?

Second-look financing supplements credit-based underwriting instead of replacing it. Lenders still rely on credit bureau data, but second-look underwriting steps in for borrowers whose traditional credit score doesn't accurately reflect their ability to repay. It's typically triggered only after a borrower has already been declined or is pending, which is why it's called a second look. Here’s how it works:

Step 1: A borrower applies for a loan

The lender pulls traditional credit data on a borrower during a loan application. The borrower has a thin credit file that’s around the margins of what’s approvable based on the lender’s underwriting strategy. The lender may “pend” the application for more information or outright decline based on its risk appetite.  

If they decline the application without obtaining more information, the lender may be leaving a potential customer on the table because the lender didn’t know that, despite their low credit score, this applicant has a steady income from a self-employment business that could have helped qualify them for this loan. The borrower wouldn’t get the financing they need and their credit score will take a hit from the decline.

Step 2: The lender prompts a “second look”

With second-look underwriting, the lender could prompt this applicant to link their primary bank account to get a more holistic look at their creditworthiness—typically through a financial data network like Plaid. 

Plaid Check helps lenders take a second look at applicants by turning raw account data into cash flow insights and a risk score built for underwriting. 

Step 3: The lender reviews cash flow data 

By looking at cash flow data like bank account balances, income (whether from salary, part-time, gig-economy work, or government benefits), transaction history, and other account activity, the lender can verify the steady income. If the cash flow data supports the borrower's ability to repay, the lender can turn a “no” into a “yes”.

How is second-look financing different from traditional underwriting?

Traditional underwriting relies on credit bureau data, which is a record of how a borrower has borrowed and repaid in the past. Second-look financing supplements that with real-time cash flow data, like income deposits, balance history, and payment behavior pulled directly from a bank account. Credit bureau data measures history; cash flow data measures the present. 

Who benefits from second-look financing?

Second-look financing is a win-win scenario for both lenders and consumers, offering several benefits.

Second-look financing benefits for borrowers

Consumers can access credit they may have previously been denied, often at lower interest rates, through second-look underwriting. This can limit the impact of small emergencies, such as a car breaking down, by giving them financial flexibility. It also gives people who have faced financial hardship in the past, but are now in a stable position, a more accurate evaluation, so they can keep building credit instead of being held back by an old score. 

Borrowers that may benefit from second-look underwriting include:

• Credit invisibles. Consumers who are credit invisible have little to no credit history, so they have no record of repayment. A second look that shows regular direct deposits and consistent rent payments can help a lender approve a loan when a traditional credit score alone isn’t enough.

• Subprime borrowers trying to rebuild their credit. Cash flow data can show a lender that a subprime borrower is managing money responsibly, even if the score hasn’t caught up.

• Gig workers and self-employed individuals. A freelancer or delivery driver may earn more than a salaried employee, but their income can look inconsistent on a credit report. Cash flow data can show aggregate monthly deposits and their trend over time. 

• Recent immigrants. Establishing credit in a new country takes many years, so a borrower with a good financial history back home starts at zero when they come to the U.S. Second-look financing takes into account other factors that can help lenders look beyond a traditional credit score.

Second-look financing benefits for lenders

Lenders also have much to gain from second-look financing, including access to a wider customer base. Using cash flow data like utility payments and non-W-2 income allows lenders to assess risk for a broader range of applicants, which can increase loan approval rates. Other benefits include: 

• More complete risk assessment. According to the CFPB, using cash flow data in addition to traditional credit scores is more likely to predict late payments.

• Improved customer loyalty. Offering second-look underwriting can enable lenders to build loyalty as customers are likely to have a more positive view of a lender willing to take a chance and help them build their credit. 

• Stronger loan terms. Once someone is already approved, strong cash flow data lets lenders compete on price rather than risk, offering higher limits, lower rates, or faster funding. 

• Expanded access to affordable credit. Second-look underwriting can help level the playing field for borrowers who have historically struggled to get affordable loans.

How does Plaid support second-look financing programs?

Plaid’s underwriting solutions can help lenders provide second-look underwriting and expand their customer base. With Plaid, lenders gain a holistic, 360-degree view of a borrower’s financial situation, empowering them with risk scores and insights that go beyond traditional bureau reports. Lenders can access real-time cash flow data in as little as 10 seconds, enabling them to better assess applicants who may otherwise be overlooked. LendScore builds on this information, combining cash flow, income, and network insights into a credit risk score, with reason codes to support adverse action and FCRA compliance.  

Make smarter, faster second-look decisions with cash flow insights, differentiated risk signals, and LendScore, so you can say “yes” to more qualified borrowers. 

Second-look financing expands credit access 

Traditional credit scores are a crucial piece of the lending decision process. However, relying on credit scores alone closes the door for many consumers. Take the example of an immigrant who has held the same job for five years, has never opened a credit card, and lives well within her means. While she may lack a credit score, with second-look financing, that hard-working consumer may be able to access credit to purchase a reliable car or cover much-needed dental work. 

The world of lending is changing. Open banking provides lenders with access to more data while improving the user experience. Second-look underwriting is, in turn, expanding access to credit for millions of Americans while giving lenders access to a broader customer base. 

At Plaid, we're excited to be a partner in creating a future where more people have access to the credit they need and lenders feel empowered to leverage cash flow data to make smarter risk decisions.