Hey everybody! It’s apparently Guest Post Month here at Angry Retail Banker (because hell if I’m gonna write for this damn blog) and I’d like to introduce to you a very special guest today. Rebecca Kennedy, a contributor to Business Insider and other publications, is going to talk to you guys about alternative lenders. You see, I’ve gotten
tired of dealing with people who “can’t understand how a FICO score of 560 means they can’t get a loan pretty interested in newer fintech companies that are changing the way finance is done, so something about the merits of alternative lenders really got me interested!
Alright, Rebecca, go for it!
When most people think of taking out a loan, a bank or credit union quickly comes to mind. For years, traditional financial institutions were the go-to for lending options, but the digital age has changed that reality for millions of borrowers. The rise of financial technology gave way to a slew of online and alternative lenders which consistently promise to give consumers a different way of doing business. Here’s what makes alternative lenders different from conventional banks as it relates to individual loans.
The Application Process
As the name would suggest, lenders that operate online give borrowers the opportunity to complete the loan application process from anywhere, at any time, without the hassle of visiting a bank branch location during normal business hours. Some alternative lenders, like local title loan lenders, may require an in-person visit to evaluate the collateral being used to secure the loan, but the application process is far less complicated compared to big banks. That doesn’t mean alternative lenders don’t spot check your payment history or income; it simply means borrowers have more control over when and how they apply for a new loan.
Banks are well-known for having a variety of lending products, including credit cards, secured and unsecured loans, and lines of credit, all with different interest rates. The interest rates charged on bank loans has traditionally been lower than other vehicles, but alternative lenders have found ways to compete with loan pricing. Some new lenders use a marketplace platform, meaning individual or institutional investors come together to help fund the loans for eligible borrowers. The lender simply acts as the intermediary.
When alternative lenders are not putting their own capital on the line to fund a borrower’s loan request, they have the potential to offer lower interest rates on new loans, effectively reducing the cost. A number of alternative lenders also give borrowers a choice between fixed and variable interest rates, as well as ranging repayment terms that better fit within their monthly budget.
The most significant difference between bank loans and alternative lender loans is the factors and processes used to evaluate the creditworthiness of applicants for new loans. For a traditional bank loan, a borrower is required to complete an application that asks questions about income, employment, housing circumstances, and assets. A loan underwriter then reviews the loan application details, pulls the individual’s credit history, and makes a decision based on these combined factors. Alternative lenders put technology to good use by using a handful of different factors to review loan applications. There is often still an evaluation of credit history and score, but some alternative lenders also take into consideration a borrower’s educational or professional background and potential future earnings to determine loan eligibility.
Simply put, a handful of alternative lenders are less rigid in how they assign risk to a borrower, meaning individuals with less than ideal credit history may be approved for a loan, unlike they would with a bank.
Bank loans have their merits, but alternative lenders are continuing their rise in popularity given the benefits they afford to a greater number of borrowers. When you’re in the market for a new loan, it is important to do your due diligence and shop around to a variety of lenders before making your choice.
Readers–What do YOU think!? Are you ready and willing to go to the new age lenders to satisfy your borrowing needs? Or would you rather stick with “ol’ reliable” and work with the trusted financial institutions you’ve known your whole life? What’s the most creative twist of money lending you’ve ever seen? Leave your thoughts in the comments below!