In the present landscape where the Internet rules the world, online lenders continue to gain ground over traditional ones. Individuals and businesses are hungry for capital and prefer to pay a higher interest rate than to wait weeks or months for their application approval. People apply for a loan because they have an immediate issue, only cashflow could solve. In 2019, the average personal loan was $11,650, but the amount varies depending on the purpose of the funds. Loans used to start a business are the higher and exceed $15,000.
For individuals and small companies, choosing a lender is about the timeframe and the conditions it provides. The average traditional loan application starts with the borrower filling out a form. Both online and off-line lenders ask their applicants to fill a form to provide contact information, but this is only the first step in the process, the following ones trigger the time sink.
Traditional banks need information in the form of multiple documents. The applicant must gather the data, fill various financial forms, scan, copy, print and send it to the bank. A bank representative organises the information, creates reports and handles the application to a credit team, that should analyse it to figure out if the applicant meets the requirements. The entire process is time-consuming, and most individuals and small businesses don’t afford to wait. And often the applicant forgets something on the list or needs to provide additional detain due to some discrepancies or irregularities, so more time is wasted.
Online lenders need less information, and usually ask the applicants to provide data digitally. They understand that time if money and their clients need a quick answer.
You already know what a bank is, but you may want to find more about alternative lenders. They are financial organizations that offer function options in the form of term loans, SBA loans, line of credit, or working capital advance. But which solution is best for you?
Let’s review both.
Banks prefer more predictable clients, with fewer risks because, in the aftermath of the last financial crisis, they came up with more restrictions and conservative conditions. While some banks have more relaxed requirements, small organizations still follow strict standards.
On the other hand, online lenders understand the needs of the average borrowers. Individuals and new or non-profitable companies find it challenging to provide lenders with complete credit histories, and they fail to find the right loan when they address to traditional organizations. But, online lenders have more relaxed standards and are willing to take a risk to assist their clients.
Because they provide cash fast, some online lenders have higher charges. Banks are known for the lowest interest rates on the market, but online providers compensate through their superior conditions and performance. People prefer flexibility instead of low-interest rates because they need funds fast to solve their financial issues.
Most banks have interest rates below the average credit card, while an online lender can charge from 7% to 25% more. But online lenders don’t ask sin-up or withdrawal fees, so their terms are still more profitable than the ones traditional organizations provide.
Ease of funding
Individuals and businesses look for alternative lending solutions because with banks, the chances for approval are lower. Forbes provided the approval percentage for traditional banks versus online lenders, and while banks offer 27% of their clients with money, online lenders help 57% of them. Many people prefer solutions like Tangerine high interest savings account because they provide them with a simple, easy everyday banking experience.
Why is there a disparity between these two different function solutions? Below are the factors that determine if a bank approves an application.
The credit score is the determining factor when you apply for a loan with a bank. Each bank has its unique credit score requirements, but most of them require clients to have a credit score higher than 600. When clients have lower credit scores, they pay higher interest rates. Most online lenders ask their clients to carry a minimum credit score of 500, and some are even willing to forget about the credit score if the health of the applicant’s financials show they can repay the loan. Online lenders find more important the ability of the client to repay the loan in the short term.
Age of business (for companies)
With over 20% of companies failing in their first year, banks prefer to work with seasoned businesses. To lower their risks, traditional lenders require businesses a minimum amount of time in the work field. For online lenders, the age of the company isn’t necessarily a determining condition. They offer extra points to older businesses, but they treat the same all their clients.
Collateral is the process of securing the loan with an asset like a real estate, piece of equipment, or automobile. Depending on the value of the loan, traditional banks require security in the form of collateral. Most organizations use a loan-to-value ratio to determine the sum they can provide the client. Most times, they offer from 60% to 80% of the value of the collateral.
Most online lenders don’t ask their clients for collateral. Why do online banks use this strategy? Because their online purpose is to make a profit, and they want to ensure they have some assets secured if the client fails to repay the sum. Alternative lenders are also in the market to make a profit, but they also want to support individuals and small businesses because they are the backbone of the economy.
Both banks and alternative lenders offer secured and unsecured lines of credit. Unsecured loans are credits that aren’t tied to any type of collateral, and they tend to provide limited funds because, through their nature, they’re riskier.
Banks prefer secured lines of credit, and they accept collateral ranging from certificates of deposit to real estate and inventory.
Online lenders mostly work with unsecured loans because they find the process of securing property too complicated, and it limits their effectiveness to provide their clients with funds fast. Alternative funding is more out-of-box, but not in a negative way. Online lenders found ways to meet the present market needs and deliver the services their clients require.