Online Loans Continue to Rapidly Gain Market Share
There is a good reason online loans continue to gain market share: with millennials reaching a point in their lives when they need and are able to borrow money, modern-day lenders are being forced to change the way that they do business. According to millennials, traditional lenders are sluggish when it comes to originating and servicing financial products. They’re also more restrictive in issuing approvals.
Online Loans are a Growing Financial Product
A recent TransUnion report predicted that secured and unsecured loans will continue to grow. The credit reporting agency expects personal loans to do particularly well since the financial product is becoming more popular with prime credit consumers.
Jason Laky, the senior VP and consumer lending business leader for TransUnion, commented on the growing sector. He said, “As new, well-funded online lenders and ‘fintech’ startups entered the market, personal loans had a broader appeal for consumers across all risk tiers.” The credit agency identifies unsecured financial products as such as online cash loans that borrowers pay back in a short amount of time.
Laky also said, “In the past two years, consumer adoption of unsecured loans has increased.” While statistics show that those who are in the prime and better credit risk tiers are more likely to be approved for an unsecured loan, some who are in the subprime risk tier are also receiving loan acceptance. In fact, the agency’s estimates show that of the 13.72 million people with a personal loan that’s unsecured, 3.51 million have subprime credit. This is an increase of 9.8 percent within a year, confirming that the market is changing.
Technology Makes Online Lending Possible
Online lending comes in a variety of forms. Instead of dealing with paper-based processes that are time consuming, online lending platforms are streamlined and fast. Companies that engage in online lending use technology to underwrite, source and service modern-day loans.
CNBC reports that the availability of big data technology allows the lenders of online loans to make quick and sophisticated underwriting decisions. The technology does this because it allows lenders to gather information online, determine lending eligibility and verify a borrower’s identity. It also obtains data from third-party sources. These elements make borrowing easy and convenient for consumers while increasing access to credit. Not only does online borrowing benefit consumers, but it also provides investors with high-yield moneymaking opportunities.
Online Lending is Challenging the Status Quo
When the loans online sector first made its appearance, traditional lenders, such as banks and credit unions, ignored it since it defied the status quo. However, the online loan industry has grown considerably in the last few years. Statistics show that the industry has made about 1 million loans that are worth an estimated $12 billion to everyday consumers and small business owners.
This growth has caught the attention of traditional lenders causing them to enter the market by investing in loans that are being processed by top online lenders. Traditional financial institutions are also lending money to those who are investing in online lending. Banks are teaming up with the industry’s largest lenders to gain a competitive edge in consumer loans online. Even companies like Goldman Sachs are interested in online lending. Traditional lenders are also looking into ways to connect consumers who have been turned down for a loan with alternative lending sources like online lenders.
The growing market share of online loans is encouraging the development of technological solutions to support referrals while improving the connection between online lenders and borrowers. Real-time matching programs are able to seamlessly connect borrowers to alternative lenders.
The Online Lending Industry is Experiencing Growing Pains
Inc. reports that the U.S. Department of Treasury has been looking into ways to update its regulations for online lenders, ensuring that it keeps up with the sector’s growth. Karen Mills, the former U.S. Small Business Administration head, published a policy paper that raised questions about the best way to oversee the market. The regulatory departments also have questions about who the right regulatory body should be. Currently, the online lending sector is covering a financing gap left open by major banks and other lending institutions.
Some industry experts are accusing the industry of participating in the kind of lending practices that caused the 2008 financial crisis. However, a number of online lenders have defended their business models, claiming that they are taking on the proper amount of risk when making loans online. These lenders say that they care about the wellbeing of their customers and that they’re regulated enough.
How is the Online Loan Industry Regulated?
The growing lending platform has caught the attention of the Consumer Financial Protection Bureau and the Treasury Department. These agencies are keeping an eye on the lending practices of these organizations. They have yet to enact regulations against the sector, but they may decide to do so if they discover that consumers need to be protected from it. Regulations could increase operating costs for online lenders and slow down the industry’s growth.
A number of federal regulations make the practice safe for consumers. One federal rule protects consumers when they’re engaging in electronic transactions. The nation’s truth in lending laws are another regulation. This rule oversees loan terms and the cost of loan products.
Because online lenders don’t hold deposits, the Federal Deposit Insurance Corporation, or FDIC, doesn’t cover them. In addition, online lenders are not governed by the same capital requirements that federal regulators have in place for banks. Capital requirements for banks mandate that these financial institutions cover loan losses. Some industry experts worry that since alternative lenders don’t have to abide by the same bank regulations, they may operate more aggressively.
Lenders Defend Their Business Model
Profitable online lenders defend their business model by pointing out that they have a vested interest in processing good loans online. One company confirmed that it holds 50 percent of the loans that it makes on its books. Investors buy up the other 50 percent. To be profitable, lenders must operate responsibly. Doing so requires them to be transparent about their fees. Some have even eliminated origination fees.
Online lenders offer consumers choices by giving them different pay options. This may include setting up a direct debit, automatic online payment or accepting a paper check. Offering payment options is an important point because those who are against this form of lending often accuse online lenders of only permitting borrowers to pay electronically through their checking accounts.
When Will Loans Online Become Mainstream?
While online loans remains a fresh, new way to borrow money, the industry’s growth and maturity will someday turn it into a mainstream borrowing option. With traditional lenders on board, the difference between old school lending and its online counterpart is sure to become indiscernible.