Traditional VS Non-Traditional Lenders

Online lenders are already gaining headway on traditional banks in the lending industry. The reasons for non-traditional lenders' increased appeal include speed, convenience, and availability of their service. People in need of rapid cash typically prefer to pay a high-interest rate in return for speedy processing rather than face extensive procedures, discomfort, and strict accessibility conditions, while paying lower interest rates. So, let us go into the specifics of these two forms of lending to determine which is a better option: conventional banks or modern digital lending companies.

Traditional Lenders

Traditional lenders are banks or credit unions. Initially, they were very picky about approving the loan as the only lending source. Not much has changed since then, as these lenders continue to select borrowers with a high accessibility threshold. However, they offer lower interest rates as compared to online lenders. So, if you are an individual with a perfect credit score or a business with an established track record, a conventional lending route may be the best choice for you. Don’t forget that traditional lenders set very high accessibility standards that are often interpreted to lower approval rates. In addition, you won’t get your money as quickly as you can get it with their modern alternatives. 

About Non-Traditional Lenders

The introduction of digital systems changed every aspect of life, including lending; everything goes from traditional to non-traditional. These changes are not accidental, as we live in the era when every minute counts; how can we afford to lose them? So, digitalization helps you obtain the required funds from the comfort of your room. In addition, the non-traditional lenders offer alternative lending means other than banks. Apart from the ease and speed that come with these lending opinions, they are specially designed to give a second chance to borrowers having accessibility problems with bank loans. Though non-traditional lenders have many opponents pinpointing their bad sides, embracing the fees and high-interest rates, we can’t overlook their beneficial sides to giving a helping hand to people when they most need it. 

Types of Non-Traditional Loans

Common types of non-traditional lending are payday loans, online installment loans, personal loans, cash advances, and bad credit loans. 

Payday loans are the most common type of alternative lending. They are small short-term borrowings that should be repaid in full once the debtor gets his paycheck. Hence comes the name “payday.” Considering the short payback periods ranging from two to five weeks, the available amount for these quick borrowings is small and can’t exceed $2500. Paycheck loans are aimed to help the borrowers to get out of the financial hole and not vice versa. That’s why online lenders check how much loan you can afford before approving your loan request. 

Compared to payday advances, installments loans are available in more considerable sums and are aimed at big-dollar expenses. These borrowings should be paid back over months or even years, enabling the borrowers to pay back the borrowed amount in smaller installments, which contains a portion of the loan’s interest and the principal amount. 

Bad credit loans are as they sound. They are designed especially for people with bad credit portfolios. However, they might have exorbitant interest rates. 

Cash advances act much like payday loans. They are also provided for short repayment periods and are aimed at covering emergency expenses.

Mind, whatever alternative lending types you choose, you are free to spend the borrowed amount on anything you like. No lender will question you about the reason behind taking the loan. 

Credit Score & Lending

When speaking about traditional lending, we can’t overlook the credit score that reflects the borrowers' good repayment behavior. 

A credit score is a numerical representation of a borrower's credit history based on information from the major credit agencies.

Here is how it works: In the event of a late or non-payment, your information is sent to one of the three credit bureaus, Experian, Equifax, and TransUnion, each of which has a different scoring algorithm (Vintage, FICO, a Community Empower). All factors considered when calculating credit scores, payment history, overall debt, new credits, the number of credit cards possessed, and credit usage. However, the payment history is the most critical aspect in calculating the score. The FICO score, which runs from 350 to 850, is the most prominent and well-known model. The higher the digit (above 650), the greater the borrower's prospects of obtaining a loan, and the lower numbers (lower than 650) signify a negative credit score, restricting borrowing opportunities.

For conventional lenders, information on how a borrower handled a past debt is critical in establishing the debtor's creditworthiness and ability to pay. However, the situation is not always that clear-cut since this approach makes it difficult for people with good credit to obtain bank loans if they have never dealt with such financial goods before. Moreover, traditional lenders may see these borrowers as risky due to the lack of credit score-making data. Simultaneously, a regular bank customer with a strong payment history may be regarded as an ideal borrower, even if their finances are in a bad state.

When banks turn down people with good credit, non-traditional lending comes to their rescue, allowing them to quickly get the finances they need. These modern lenders do not perform hard credit checks, which lengthen the lending process; instead, they provide loans depending on the borrower's present financial situation, regardless of their poor credit score figures. In other words, digital lenders enable borrowing for both individuals and corporations.

The Bottom Line

Each of these sorts of borrowing has advantages and downsides. However, keep in mind that most consumers seek a loan because they have an immediate cash flow crisis and speed is essential. As a result, individuals are typically eager to resort to non-traditional lenders, even if it means paying more than they would to traditional lenders. However, borrowers should be aware that there are no similar circumstances and that if the kind is advantageous to some, it may have terrible implications for others. So, before applying for any form of financing, carefully consider all of your possibilities and comprehend your repayment capacity.