Consumers are turning to alternative lenders over banks
Access to traditional credit is difficult for the millions of unbanked and underbanked Americans. As a result, alternative lending has become extremely popular, especially in the years following The Great Recession. Current projections indicate alternative lending will continue to rise over the next five years.
During the COVID-19 pandemic, lenders and creditors across the board have gotten more restrictive with their credit approvals. This limits options for people seeking loans and credit. Between these limitations and the ongoing growth of alternative lending, it seems safe to assume, even after the pandemic ends, consumers are likely going to continue to turn to alternative credit solutions largely driven by FinTech.
What is alternative lending?
Alternative lending is exactly as it sounds. Instead of people going to a bank or other entity that possesses a banking license, money is lent or credit issued by a non-bank entity. Many non-banks engage in typical bank-related services, such as allowing purchases on credit, issuing loans, or approving mortgages. They are often a good option for consumers who are unbanked or underbanked because they don’t necessarily rely on traditional credit scores for their decision-making.
Why consumers are ditching traditional lenders
According to Business Insider, more than 40% of consumers feel non-banks can better help them meet their financial needs. Alternative lenders are typically less restrictive than banks and offer a more simple and less time-consuming application process. Since loans are easier to access from these sources, traditional lenders are being spurned by borrowers in favor of speed and efficiency.
As the U.S. recovers from the coronavirus pandemic and consumers start spending again, they will likely continue to turn to alternative funding sources to meet their financing needs. This will be especially true if retailers and merchants continue to push for e-commerce sales or making contactless payments in-store as they have during the pandemic. Statistics published by The Financial Brand indicate 30.1% of consumers have purchased on a “buy now, pay later” option offered by FinTech entities.
In a nutshell, alternative lending options will become quite appealing to people who don’t have a plastic card to use online or to pay at the counter.
Types of alternative lending
Technology continues to play a large role in the ongoing transformation of traditional lending processes. Consumers have many choices when it comes to alternative lending options including small business loans, P2P (peer-to-peer), and POS (point of service) financing. The latter has seen tremendous growth during the pandemic.
Big-name companies, such as PayPal, Kabbage, Square, Amazon, and Quicken are connected with a number of these alternative lending options for consumers, to name just a few of the larger players. It’s anticipated much competition will emerge between the banks and the dozens, if not hundreds, of alternative financing options available in the upcoming years.
Alternative lending appears to have a broad appeal and also may give people who are unbanked or underbanked additional options. Historically, these groups of consumers have had limited options, most often having to turn to services such as payday loans, auto title loans, installment loans, rent-to-own services, and other types of short-term loans.
While these services are helpful, they also can get very expensive due to high-interest rates and fees, which can contribute to a snowballing of debt. Not to mention consumers also need to beware of predatory lending, which unfortunately is still an ongoing problem. Earlier this year, the Wall Street Journal reported ads for these loans were cropping up online in Google, Facebook, and other prominent areas of the web.
Red flags to watch for when applying for an alternative loan
Consumers who are considering applying for a loan from an alternative source should understand how it works and takes a few other details into consideration before applying. While many loans carry reasonable interest rates, consumers might discover some alternative loans may still charge high-interest rates or carry terms that make the debt hard to pay off.
- Look to see if the lender’s website is secure.
- Read the fine print, and if there is none, consider this a red flag.
- Understand the loan's terms and, if they are confusing, ask a trusted friend or family member to read the agreement.
- If the loan’s terms are not clearly spelled out with all fees and interest rates disclosed, look for another lender.
- Determine if a loan's terms are long-term; like any other loan, the longer the loan period, the more interest charged.
- Avoid any lender that asks for advance fees or any amount of money upfront.
Additionally, consumers should avoid any alternative lender that attempts to push them into making a fast decision or wants them to take out more money than they need. Legitimate and fair lenders will be upfront and not use high-pressure techniques to make people sign a document before they understand what they are agreeing to in a loan.
Alternative credit scores help consumers gain access to credit
Alternative lending continues to transform the broader lending marketplace. It’s important to know all lenders will still want some reassurance the money they lend or credit they issue will be paid back. Consumers who do not have a traditional credit score still have the opportunity to gain credibility with lenders through an alternative credit score. An alternative credit score can be achieved by consumers who pay their regular monthly bills on time.
Connect, formerly known as PRBC, has been helping consumers build alternative credit scores since 2005 giving millions of Americans the chance to demonstrate their creditworthiness to lenders and creditors. Connect’s service is free to consumers. All you have to do is sign up with our service, use our tools, pay your bills on time, and track your score. We will do all the rest!
To learn more about how Connect can help you build a strong alternative credit score to help open up your loan and credit options, contact us today.