Key Differences Between Traditional Lending and Online Lending

Although traditional lending institutions are still essential to the banking industry, online lending platforms are gaining more traction. Digital lenders have the capacity to provide a same day loan, where you may not always get your loan funded within the same working day, but it won't take up to several weeks as it would with traditional lenders.

Let's dive into what else differentiates these two lending platforms.

Loan Application

Applying for a loan in banks and traditional lending institutions require you to physically visit the branch, fill out application forms that are often lengthy, and submit some supporting documents. Some banks allow borrowers to submit an application form online, but you still need to visit them physically before they process or approve your loan.

With digital lending institutions, the entirety of the loan application process is done online, so it's convenient and fast.

Eligibility

It's harder to qualify for a loan via traditional banks than through digital platforms. Banks look at your current income, assets, employment history, housing, and credit score to determine your creditworthiness.

Digital lenders still consider a borrower's credit history, credit score, and current income when determining creditworthiness. However, they also look at someone's education level, professional background, and social media authorization. That's why small business owners opt for online loans when they fail to qualify for bank loans.

Lender Options

When borrowing money from conventional lending institutions, you must visit or contact multiple banks to compare interest rates and loan terms.

On the other hand, some digital lending platforms have access to multiple lenders. When you submit a loan application, the platform connects you with a lender, who then provides you with the terms and conditions, and you can accept it if you want. You're not obliged to take any loan that you're not comfortable with.

Paperwork

Banks and traditional lending institutions require borrowers to submit more documents than online lending platforms. For example, suppose you're a small business owner looking to request a loan to gain capital or expand your business. In that case, you need to submit business summaries, investment information, business plans, income tax returns, and legal documents, among others.

While certain digital lenders will ask you to submit these similar documents, it's not always the case as they often require less paperwork. Often, alternative lenders only need you to link your financial accounts upon application.

Processing and Funding

Conventional lenders often take some time to process and fund your loan. The waiting period can take weeks to months, so if you need funds for emergencies, this might not be a good option.

On the contrary, because of recent technological advancements like automation, digital lending platforms can process loan applications in hours and release funds in a matter of days, making it the ideal option for small businesses and startup owners that need funds urgently.

Technology

Traditional lenders often have outdated systems that inhibit them from delivering their services to consumers as quickly and efficiently as online lenders.

On the other hand, online lenders apply advanced technology to every step of the loan process—from application to disbursement. They also work hard to ensure that their interfaces are intuitive, user-friendly, seamless, and functional.

Lastly, online lenders understand the importance of ensuring that every data they collect is safe. They employ state-of-the-art cybersecurity measures to avoid cyber threats and identity theft.

Final Words

The future of lending is digital. With that, online lenders are gaining more popularity than traditional banks. They're especially an ideal option for small business owners that don't qualify for loans from conventional lending institutions. They offer numerous advantages, such as faster processing and funding times, less paperwork, online applications, and advanced technology. However, online lenders are not as regulated as traditional lenders, so borrowers may be subject to abusive lending practices. Weigh out the benefits and disadvantages before you make a choice.

Author's bio:

John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)