The lending industry is growing and adding more and more options as time goes by. Gone are the days when you had to line up for hours to complete your loan application, only to receive a rejection letter several days or weeks later. There has never been a time with as many lending options as now and this has given many individuals and businesses access to financing that they wouldn’t have otherwise qualified for.
Online lenders have changed the way people access loans. For example, would you have thought that you could access financing without collateral? If you’re shopping for a loan, whether for personal or business purposes, there are many options worth considering. What are the main differences between the traditional banking industry and online lenders? Read on to find out.
Requirements
Traditional lenders have always been known to be more conservative when it comes to giving out loans. They take fewer risks and will only approve your loan request if they have a guarantee that you’ll pay. They also tend to have stricter requirements, such as having an account and banking with them in the recent past or having transacted up to a certain amount. Such requirements have made it tougher for a lot of people to access the loans.
Online lenders are referred to as alternative lenders for a reason. They openly cater to business owners and individuals who may otherwise be seen as undeserving of loans. Their application processes are usually straightforward and easy to understand, and you don’t need to visit a banking hall or office physically. You just fill in your application and send it online or via fax.
You’ll also not be required to have all the documents that traditional lenders ask for. However, depending on the kind and size of loan you’re seeking, you should expect to be asked for the following:
- Business Tax ID
- Social Security Number
- Proof of a commercial bank account
- Financial statements
Also, some online lenders are not that strict when it comes to personal and business credit scores. Remember, they are alternative lenders. However, those that check credit scores may require a score of between 500–600. For these reasons, online lenders are great alternatives to payday loan companies.
Terms
When it comes to payment terms, traditional lenders stipulate how long you should take to pay your loan and how much for each installment. They also tend to have lower interest rates, ranging from 4–13% annually. Many traditional loans also have conditions on how you can use the loan. For example, a mortgage can only be used to purchase a home, and a car loan to only buy a car.
On the other hand, online lenders are costlier; with higher risk comes higher returns, so online lenders have to be compensated well for risking and offering you flexibility. Their interest rates range from 7–100%, and sometimes even more. In addition, most of them charge an application or processing fee taken from the loan amount.
Online lenders don’t give conditions on how you should spend the loan, though. So, many people take online loans to sort emergencies such as medical fees or car repairs.
When applying for an online loan, you shouldn’t rush as there’s so much more to consider. These include the loan’s size, repayment plan, and any limitations to how you use the loan. Also, inquire whether they have any prepayment or late repayment penalties.
Loan Amount
The traditional banking industry tends to avoid small loan amounts, so if you’re looking for a small loan amount, a bank may hand you a credit card. You shouldn’t be surprised if your bank rejects your application for a few thousand dollars because they will not profit from lending you that much money, even if it seems like a lot to your company. Underwriting a loan for $100,000 may cost the same as underwriting another loan of $1,000,000, but the bank will, of course, choose the more profitable loan, which is the larger one.
On the other hand, online lenders can offer you loans for as little as $1,000. You can also get lines of credit for smaller loans that you can tap any time you need to. Some companies refer to them as “micro-loans.”
Collateral
What is collateral? Collateral is any property or asset a borrower offers the lender as a form of security for the loan. The lender uses collateral as a way of avoiding losses should the borrower default on the loan. In case this happens, the property offered as collateral becomes property of the lender to compensate for the defaulted loan. Common examples of collateral include real estate properties and cars. You can offer your car’s logbook or property title to the lender as security. Once you pay off the amount in full, the collateral is given back to you.
Unsecured loans mean that the loan isn’t tied to any particular collateral, and are the riskiest to the lender. How will they recover their money in case you default? What will assure them that you will repay the loan in full?
Most bank loans are secured because you have to give your asset as security. However, some also provide cash secured loans. This is where you take a loan from the bank where you maintain an active account. In case you default on the loan, the bank can liquidate your account and recover the money.
Online lenders mainly dwell on unsecured loans. This makes them safer since you’re not borrowing against any of your properties. But you’re not completely off the hook. If you fail to repay the loan, your credit score is affected. The lender can also use other means of recovering their money, such as litigation or debt collection services.
Speed
When it comes to speed, traditional lenders are a bit slow. First, you have to visit the bank to fill out various forms of application as traditional loans require more paperwork and several checks. Once you’ve finished your application, it could take several weeks for approval. Some loans, such as mortgages, may take even longer. During this period, you might have to visit the bank or call the financial officer several times to check your application’s status.
Online lenders, on the other hand, are focused on convenience and providing their services as fast as possible. You can tell the status of your loan application just a few minutes after applying. You’re also notified about how much you can qualify for and how much you’re expected to pay. The time it takes to receive the money depends on how long you take to complete your application. You also don’t need to visit any office during certain hours as you can apply for an online loan from your house at 2 am if you felt like it.
The time taken to deposit the loan money into your bank account depends on the lender. Some lenders can deposit the money on the same day your application is approved and others may take a few business days. Either way, online lenders definitely take the cake when it comes to speed.
Business Creditworthiness
If you run a business, you likely already know how difficult it is to access financing for a startup as traditional lenders avoid new businesses in favor of established ones with proven track records. If your business can prove a few years of cash flow and operation, you will have a better chance of getting financing from traditional banking.
Another factor affecting your creditworthiness is the nature of your business. If your business idea is “unique,” you might have a tough time accessing traditional banks’ loans because banks often lean towards industries where the profitability is clear, and risks are low.
However, you can access loans with online lenders even when your business is fairly new. You’ll only need to show proof of sufficient revenue. In most cases, the required revenue is at least $50,000 annually. You should also consider online lenders if your business is unique as they seldom ask to see your business plan. Sufficient revenue in your business is enough to guarantee you a loan with online lenders.
Bottom Line
Online lenders have changed the way loan products work by making financing more accessible and flexible to a wider range of borrowers. Traditional loans have always had stringent requirements, such as credit score and transaction history, but online lenders don’t necessarily dwell on your credit score and may only need proof of revenue or cashflow.
Another main difference between traditional and online loans is convenience. Traditional loans may not be suitable if you’re looking for convenience because the application process is a bit lengthy, and banks take long to approve. However, with online loans, your loan may get approved and money deposited in your account on the same day of application.
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