Are Alternative Loans Right For You?
29.03.2020 by Dimi V
The Rise Of Alternative & Non-Bank Lending
The last twenty years will be looked back on as a watershed moment in the finance industry. The recession prompted financial institutions and traditional banks to rein in their lending practices.
As a result of the catastrophic financial losses and increased scrutiny from the government and the media, the banking sector was forced to impose stricter criteria to decide who it could lend money to.
Private individuals and businesses, who would once have been able to secure finance easily, then found themselves shut out and unable to access money from the more traditional institutions.
Alternative lenders take advantage of technology and artificial intelligence and machine learning to onboard their customers and run key processes.
This gap in the market, coupled with the rapid development of technology, opened up the market to a range of alternative and non-bank lenders. These lenders sit outside the traditional banking system and have become a popular choice for those looking for finance.
Collectively, these providers pose a huge threat to the traditional banking status quo across the world.
The ‘Digital Demand In Retail Banking’; a study carried out by Oracle across 13 countries found that 40% of the people they surveyed think that non-banks are better placed to assist them with their money and investment needs.
Non-bank financial institutions include venture capitalist firms, insurance firms, pension funds and currency exchanges. They offer products from mortgages to personal loans. Though they carry out many banking functions, they are not fully licensed banks and generally don’t provide deposit and account facilities.
Alternative lenders offer a range of different lending options such as peer-to-peer, cash advances (payday loans), vehicle equity release and direct lending.
Here we’ll look at some of the most popular types of alternative lending options available in today’s marketplace.
Is An Alternative Loan Right For You?
There may be a number of reasons to look at alternative forms of finance. Your credit record may be less than perfect, or you need to borrow a small amount of money, fast. Or maybe you just don’t want the hassle of applying for a traditional loan.
As with all forms of finance, you need to carefully assess whether they are right for you and your particular circumstances. There are pros and cons to any type of alternative lending.
Alternative loans generally differ from other forms of lending in the following key ways:
Flexibility - one of the major advantages of alternative lenders is the flexibility they offer to lenders. Their lending criteria is not as strict as traditional banks so their approval rates are also considerably higher.
Charges and interest rates - in order to keep their acceptance rates high, alternative lenders need to reduce their liabilities by charging higher interest rates or fees.
Shorter repayment windows- depending on the lender you use, alternative lending usually involves smaller amounts of money and shorter repayment schedules. If you are looking for finance for a relatively short amount of time (weeks or months) then they are perfect for this.
Speed - one of the greatest benefits of alternative lenders is the streamlined application and approvals process. No waiting to see bank managers, clutching stacks of paperwork.
Some lenders can make decisions in days or even hours, with money being available to you very quickly.
A peer-to-peer loan is similar to a standard unsecured loan. The main difference is that the money that you are borrowing is not from a bank, but a group of individuals.
Peer-to-peer, or social lending, connects borrowers with lenders through an online marketplace. It allows investors to directly lend money to individuals, cutting out any third parties.
Loans often have very attractive interest rates and flexible terms compared to other forms of alternative lending.
Loans are typically used for anything from debt to consolidation to buying a new car.
The lending platforms themselves do not have funds of their own to lend, instead, they are a facilitator, providing the marketplace and performing all of the necessary checks on lenders and borrowers.
Lenders on peer-to-peer platforms are often private individual investors who are attracted by the promising return on investment and tax breaks. They are willing to take on a slightly higher risk for higher returns. They make their profits from the interest generated on the loans they make.
Peer-to-peer networks are gaining traction across the world, especially for SMEs looking for early-stage funding. PriceWaterhouseCoopers has estimated that the peer-to-peer market could be worth $150 by 2025.
So which peer-to-peer platform should you choose? There have been a lot of new platforms coming onto the market in recent years that target different types of customers with varying credit histories.
The entire process takes place online. The absence of bricks and mortar offices reduces operating costs, which allows interest rates to be kept competitive.
You can tell them how much you want to borrow and over what period, they will then assess your credit record and conduct affordability checks. Though they will be conducting the same checks as a traditional lender, they are often much more flexible in their acceptance.
Some of the more popular peer-to-peer platforms include Unbolted, Leap Lending, Lending Works. Be sure to look at reviews from previous customers online, it will give you a feel for the type of company you are dealing with, and which ones you should avoid.
Direct Lending Loans
This form of finance involves applying for a loan directly from a lender. By applying for finance in this way, you are bypassing any third-party brokers or intermediaries. Often, when using a broker to secure your loan they will provide your details to a number of different companies in an effort to find you a suitable lending opportunity.
Technically, bank loans are also direct loans, as the money comes from the institutions themselves. They are more risk-averse than the alternative lenders, preferring to give preferential rates and terms only to those with solid credit records and financial history.
Now we’re seeing more and more non-banking, direct lenders entering the marketplace to serve those people who don’t want to use the banks.
By applying for a loan directly to the lender, the process is usually more straightforward. Your details aren’t passed around various companies, ending up on their marketing databases. You can liaise with them directly and vice versa.
Vehicle Equity Release
After your home, your car is likely to be your most valuable asset. For a long time, logbook loans were one of the only ways to take out a loan against your car to raise finance.
When you take out a logbook loan, you will be asked to hand over the registration (logbook) of your vehicle. The lender then becomes the temporary owner until the loan is paid back. If you default on the payments, you could lose your vehicle.
Typical APRs for these types of loans is 400% or more, making them one of the most expensive types of credit. Most money advice services will recommend staying away from this type of finance due to the risks of falling into further debt and having your vehicle repossessed.
There is now an alternative to logbook loans known as Vehicle Equity Release. You don’t need to surrender the documents of your vehicle and can borrow up to 70% of the cost of your car.
As you will be entering into a Hire Purchase Agreement rather than a Bill of Sale, you have a greater level of consumer protection.
Similarly to logbook loans, vehicle equity release can be obtained without a good credit history (though many logbook loan companies will perform a credit check on you, leaving a footprint on your file).
So long as you can prove that you are the sole owner of the vehicle, and you can afford the repayments, you’ll be accepted.
You’ll be looking at a much better APR too, somewhere in the region of 147.5%, saving you substantial amounts of money on over the repayment term.
The Role of Alternative Lenders In An Uncertain Future
The next few years are likely to be very unsettled in economic terms. The majority of the world’s biggest economies are almost certainly headed towards recession in the wake of the Covid19 pandemic.
The financial impact it is already having in virtually every country will have repercussions that last for decades.
It is likely that the institutions will tighten their risk profiles even further, preventing more businesses and individuals from being able to access much-needed finance.
Alternative lenders and non-bank institutions will be perfectly placed to make even further inroads into the traditional lending market. One of their greatest strengths is their ability to pivot quickly to react to events and take advantage of opportunities.