Editor's Note: This is the second of a two-part series on online lenders partnering with banks. The first article is available here.
So far, the marriage between online lenders and banks is looking pretty sweet for consumers and small business owners, who for years have complained about the lack of access to capital.
"It’s much faster to get a loan with online lenders and there may not be as many requirements to be approved," says Shaun Michael Maciejewski, marketing manager for Blue Bridge Financial, a marketplace lender, offering financing specifically to small businesses. "Online lending moves at the speed of life and business. You can get what you need, when you need it. It’s much more casual. You don’t need to dress up in a suit and go into a bank with piles of business history and paperwork. Now you can apply for a loan in your pajamas!"
Jonathan Hightower, a partner with the law firm Bryan Cave, specializing in financial institutions and corporate law, says this is a boon for many consumers. "People who in some cases, are otherwise unable to obtain credit, or at the very least are unable to obtain credit with terms as favorable as those offered by online lenders, are benefiting," he says.
More pointedly, says Priyanka Prakash, a small business loans specialist for FitBizLoans.com, "There is more access to credit for borrowers with credit scores under 650. You can get access to credit in as little as one business day, compared to one to three months for a bank loan. Bank loans often have more than 10 hours of paperwork."
Debt consolidation is an area where people can also leverage online marketplace lenders. "You have an opportunity to refinance your credit card debt for a lower interest rate," says Erik Brue, Experian’s vice president of partnerships and alterative data. However, "Don’t over extend and use loans which may be difficult to pay back. Stick to a budget and pay your bills on time," he adds.
Despite all the pluses, the partnership between online lenders and banks is no panacea for all that ails the lending world. For example, some businesses that have questionable credit history can end up getting approved, creating a higher default rate for the borrower (which in turn hurts the banks/investors). It can also be difficult to compare loan options because online lenders don’t always talk in terms of Annual Percentage Rate (APR), or even in terms of interest rates, warns Prakash. "Instead, they tell you the total amount of money that you have to pay back to the lender." To combat this problem, Prakash says to ask the lender for the APR. "This will allow you to better compare different online loans, as well as traditional loans."
Do ask about fees. "Some lenders charge origination fees for loans. Also, even though there aren’t usually prepayment penalties, online lenders usually provide no savings for paying off a loan before it’s due (for example, you can’t save on interest by paying off a loan early).
Like with any loan, be sure you understand the terms. "Online lenders are customer-friendly, but you still need to be careful," says Aranoff.
Most online lenders are legitimate, but there are some questionable sites that a borrower may come across, think they are trustworthy, give their personal information, and then find out the company is a scam just to get access to their information, warns Maciejewski.
Know who you’re dealing with and what bank they are partnering with. Both reputations matter.
Akouba Credit helps banks better serve small business customers with customized SaaS (software as a service) platforms. It just recently announced its latest partnership with Metropolitan Capital Bank & Trust of Chicago. Akouba is proud of its success. In the first two months with a customer it reduced the time of issuing SMB loans from 17 business days to four business days and says the organization will more profitably meet their CRA requirements for 2015 using Akouba’s system. That kind of reduction in processing and costs is a win-win for everybody.