Technology has transformed all facets of modern life, including how you borrow money. According to a recent consumer trends survey, 65% of all loan applicants since 2017 have gone online to borrow money rather than a storefront location.
While many people still seek out personal loans from a Big Bank’s website, a growing number of people are turning to newer FinTech services. According to TransUnion, FinTech lenders originate 38% of all unsecured personal loans. Today, their share of the lending pie has outgrown banks and credit unions.
Why is that? Besides the convenience of borrowing online anywhere you get Internet, FinTech offers alternative ways to apply and underwrite loans.
They’re Available with Bad Credit
The chance you’ll be approved for a traditional bank loan often hinges on your credit score. Most of the biggest banks see a low credit score as an unnecessary risk when granting funds, so they might reject applications from anyone with subprime credit.
Historically, the biggest bank’s emphasis on credit scores pushed many people with bad credit into borrowing costly payday cash advances.
These cash advances are due back in one lump sum by your next payday, usually two weeks from your borrowing date. Most payday loans also come with three-digit APRs, making these cash advances challenging to repay in one lump sum.
While some states have implemented laws capping these APRs, some states, like Missouri, have no such regulations in place. The APR on a $300 loan can be as high as 527% in Missouri as a result. Look at this picture for more insights on APRs in other states.
FinTech provides alternatives to these payday cash advances for people with bad credit. While their online installment loans and lines of credit might also have high APRs, they come with longer repayment terms. This means the typical bad credit personal loan in Missouri divides what you owe over multiple installments, giving you more time to come up with the cash you need to pay off your loan.
They Use Alternative Data for Risk Assessments
If credit isn’t the only deciding factor when assessing your creditworthiness, then how do FinTech service providers perform accurate risk assessments?
The answer is in alternative data. Banking info, employment history, and pay schedules might supplement an online lender’s review of your credit.
These alternative data points could give greater insights into your financial situation than if a lender only looked at your credit. Their predictive value puts a spotlight on your current cashflow rather than your previous borrowing habits. This lets a lender know if you have the funds on hand to handle your repayments — whether it’s a single sum with a cash advance payday loan or several with an installment loan.
The Future of Alternative Data
Offering this information in an application comes with a definite perk. If you’ve made some bad decisions in the past that caused your score to plummet, it may not matter as long as you prove yourself responsible with money in other ways.[adsense]
However, there may be some disadvantages to using alternative data. As the technology gets more sophisticated, things like your credit card transactions, purchase history, education level, or college major may play a role in your creditworthiness. One day, your browsing history might even be involved!
Critics believe this could lead to unfair lending practices, especially if certain education levels or degrees are deemed unworthy of financial help.
The rapid growth of all online loans shows that plenty of borrowers take to the web to get the cash they need. However, FinTech might help people who are often denied loans from the biggest banks the most.