June 10, 2024
5 minutes
Why Traditional Income Verification Falls Short for Gig Workers?
Prudent AI

We live in a world where everything from financial services to retirement plans, is built around the traditional employment structure. The lending landscape is no different. Outside of small business loans, a major chunk of lenders still cater to the needs of employed professionals. But, with the rise in gig economy in the last couple of years, lenders are finding it hard to approve loans for gig workers.  

The rise of Gig Economy in the US

According to a report by Statista, there were around 68 million freelancers in 2019, in the US. This rise in the gig economy put lenders through a series of challenges. Traditional lenders' processes have been primarily tailored for employees with W-2 forms and paystubs. But since a substantial portion of gig workers receive 1099 forms, it makes it difficult for lenders to assess their creditworthiness.

This challenge is highlighted by a Fannie Mae survey collected from 3,000 lending executives across the US. As per the survey, gig income is cropping up more frequently on loan applications, but a staggering 95% of these executives find it a challenge to approve these applications under the existing regulations. And two-thirds of lending executives believe a revision in recognizing gig income could make credit access more straightforward for many applicants.

There must be a solution to all this, right? There is. But, before looking at the solution, let’s look at the key challenges faced by lenders when the applicants are gig workers.  

Challenges for Lenders


Gig workers defy the traditional norms of income verification. Their autonomy and flexibility lead to unpredictable income patterns, posing a distinct challenge for lenders. Let's explore some of the key challenges faced by lenders while evaluating applicants who are gig workers:

Inconsistent Income: The earnings of gig workers can be as unpredictable as a rollercoaster. One month might be a struggle, while the next could bring a windfall. Such instability renders traditional income verification approaches ineffective.

Multiple Income Streams: Gig workers work for multiple companies, or offer multiple services themselves, leading to multiple income streams, spread across two or more bank accounts. This dispersal complicates the task of income verification for lenders.

Lack of Documentation: Gig workers don't possess the regular paystubs or W-2 forms that salaried employees do. So, lenders are forced to make a lending decision based on the insights they gather from the applicants’ bank statements. Poor decision-making at this stage leads to more bad loans which might impact the lender when they sell the loan to an investor.  

Industry Regulations: Lenders are required to abide by rules set down by Fannie Mae and Freddie Mac, two industry titans. These regulations frequently favour borrowers who have a steady income, placing gig workers in a difficult situation.

Rigidity of Conventional Approach: The conventional approach frequently lacks flexibility and uses a prescriptive approach that doesn't account for the diverse nature of gig work.

The above challenges create a pressing need for innovative and flexible approaches to income verification. Thanks to technologies like AI (Artificial Intelligence) and Machine Learning, lenders can now effectively evaluate the creditworthiness of gig workers and pre-approve their loans within minutes.  

Analyzing Gig Workers’ Creditworthiness Using AI


Traditional income verification process relies on manual review of borrower bank statements, making it cumbersome, expensive, and error-prone.  But, with platforms like Prudent AI, lenders can instantly analyze borrower bank statements. Prudent AI’s pre-trained AI models automatically evaluate gig workers’ income certainty, look for fraud, and present loan offers with all the necessary insights for them to make safe and accurate lending decisions.  

This not only reduces the chance of human errors but also improves operational effectiveness and strengthens financial stability.

With platforms like Prudent AI, lenders can confidently pre-approve loans for gig workers.  

To more about Prudent AI and how it can help you, schedule a demo.

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