The internet has disrupted hundreds of industries over the last two decades.
Now alternative lending companies are taking aim at the banking and loan industry for the first time.
If you’ve experienced the frustration that is dealing with traditional lenders, you’ll appreciate the work being done in the categories below.
Here is a basic overview of emerging consumer finance companies taking on the entrenched financial titans.
What Is Alternative Lending?
Alternative lending refers to any type of finance that doesn’t fall into the realm of traditional finance. The traditional lending industry includes:
- Bank Loans
- Credit Cards
- Car Loans
Generally, these types of lenders are run as large corporations. They make extremely large loans or deal with millions of customers. A lot of times the only thing they ask about you is your credit score and employment status.
Alternative lenders include a wide array of new technologies and lending methodologies. In many cases, they still use the structure of traditional lenders but add cutting-edge technology into the mix.
A lot of these lending startups fall into the category of financial technology or fintech companies. They use high-end analytics and big data to discover new markets and ways of lending.
Peer-to-peer lending was a major breakthrough for alternative sources of finance. Similar to crowdfunding, peer-to-peer lending allows individuals to personally lend to borrowers.
The thought behind it was that many good people may have difficulty accessing traditional financing. By allowing them to seek individual financing they can leverage personal value beyond their credit score. Those lending the money can either do it as a charity or as a money making venture.
Different companies offer different services with some paying interest and others just returning the capital. For those that pay interest, it can be a great way to invest your money. Many peer-to-peer lenders pay more than you could get from a savings account or bonds.
They have very high rates of repayment and in many cases are a great way to invest your money.
There’s been a lot of buzz about microlending in the last few years. Many people though still don’t know what a microlender is or how they’re different from a regular loan.
Microloans are small loans paid to regular people and generally totaling less than a thousand dollars. In the past lenders weren’t interested in making loans this small because of the costs of creating a loan. It simply wasn’t cost effective.
There are lots of companies moving into the microlending market, especially in the developing world. In many parts of the world, it was almost impossible for people to get financing in any form. India was a major example of this.
Many poor Indian’s had no assets, no credit history, and no way to access financing at all. A startup called the Grameen Bank changed this. They paid out very small loans that relied on personal honor and promises for repayment.
These loans are generally used for things like purchasing livestock, making improvements to small businesses, or other capital purchases. This allowed the borrowers to make repayments more readily. Large financial firms were shocked when they found out this microlender was actually seeing higher repayment rates than they were.
Online Mortgage Brokers
In the old days, just a decade ago, you had to physically go to a bank to apply for a mortgage. Usually, you needed to have an existing relationship with the bank and if you didn’t like what they offered there weren’t a lot of options.
“Shopping around” wasn’t really a thing people did when trying to get a mortgage. If you were lucky and lived in a large city you could go, in person, to three or four different banks to see what they would offer you.
Nowadays there are literally hundreds of online mortgage brokers happy to give you highly competitive interest rates based on your credit. There are even sites that specialize in automatically applying to dozens of different brokers to find you the best terms.
Short-Term Loans for Single Transactions
Credit cards were a major breakthrough when they became available for everyday consumers. For the first time, it was possible to finance everyday purchases. Sad to say though many people have abused credit cards to the point where they’ve become more damaging than beneficial.
New lending startups emerged that partnered with hundreds of online retailers. They allowed you to get single transaction financing for individual items. Instead of opening a credit card account that works anywhere you have one loan for one item.
For consumers who have difficulty tracking their spending this is a big deal. With credit cards, it becomes very easy to blow your budget. You don’t even think about putting food, drinks, and other purchases right on the card.
It can be a big shock at the end of the month when you realize how much you actually spent. By using single transaction lenders you can finance the things it makes sense to finance without falling into the credit card trap.
Bad or No Credit Direct Lenders
If you’ve ever experienced the frustration of trying to get a loan with bad or no credit these lenders could be for you. They are willing to take a risk on good people who’ve made some mistakes.
Many lenders specializing in bad credit loans, like the ones on this web page. They take into account things other than your credit score when working with you.
Be forewarned though you will probably have to pay higher interest rates. They’re willing to take a risk with you but they have to protect themselves somehow.
Always Explore Your Options
For decades traditional lenders and big banks have had a lock on financial services. Thankfully new startups and innovators are disrupting this stagnant industry. Make sure to find out if you can benefit from alternative lending before you give your money to Wall Street firms and megabanks.
The technology world is constantly evolving and changing, make sure to keep up to date on the latest trends with our other fascinating articles.