Where governments come up short in mitigating the impact of the economic depression, many are turning to fintech lenders who can provide easy to access funds. Actually, even before the pandemic triggered an economic fallout in the U.S. fintech lenders became the go-to entity from which millions of Americans took out unsecured personal loans.
Statistically, related data revealed that in the first quarter of 2019 alone, 19.3 million American consumers have availed of at least one personal loan.
About the Personal Loans Offered by Fintech Lenders
Personal loans provided by fintech lenders do not require the assignment of a collateral and are available to individuals even if for non-business purposes. Such loans can be released to qualified borrowers in a matter of hours, 24 at the most; Mainly because fintech lenders leverage technology, mobile banking and use of big data in analyzing, processing and determining whether or not a personal loan applicant merits approval.
Moreover, fintech lenders provide options for lower personal Loan rates when compared to purchases paid by way of credit cards or unsecured loans availed from traditional banks.
Why Fintech Personal Loans Have Lower Interest Rates Than Credit Card Companies and Banks
Although credit card companies calculate monthly interest based on a stipulated Annual Percentage Rate (APR) interests paid on credit card purchases tend to balloon. The principal amount of a credit purchase usually falls due on the following month. This means that when credit card users pay only the recommended minimum amount instead of paying their credit purchase in full, the interests due on the unpaid balance is compounded monthly. Compounding interest means interest is calculated based on the principal balance plus the unpaid interest.
As of the first quarter of 2019, the outstanding balance of credit card transactions among American consumers amounted to $772 billion. On an overall view, credit card companies are therefore compounding interests on this total value on a monthly basis. Compare this to the total outstanding balance of personal loans derived by American consumers from fintech lenders. The total amounted to only $143 billion because fintech lenders do not compound interests on the principal amount extended as personal loans.
Traditional banks on the other hand impose higher interest rates on unsecured loans. That is partly due to the fact that banks pay interest on bank customer deposits that serve as main source of money lent to borrowers. That being the case, there must be a reasonable spread or difference between the rate used as basis on interest paid on deposits and the rate used in calculating the interest collected from borrowers. That way, banks can profit from their lending transactions. Banks also need to generate income that provides the funds to use in maintaining and operating a banking institution that customers can trust to safekeep their money.
Fintech Lenders are Here to Stay
Fintechs lending companies are backed by investors who provide the money being lent out to customers. Inasmuch as fintechs generally carry out their lending transactions online and by way of mobile application, their operating costs are minimal when compared to the costs incurred by traditional banks and credit card companies.
That is why fintechs can afford to offer lower interest rate on personal loans. Actually, these modern lenders have disrupted the conventional approach to lending. They are likely to stay since they are using consumer-centric technological innovations that allow them to offer lending as a service and not as a product.