Online Vs. Traditional Lenders: What’s the Difference?
It’s common to need additional financial help throughout your life, whether that’s short-term loans to help with an emergency, a mortgage to buy a house, or a business loan to get your ideas off the ground – but how much do you know about the lenders that offer these loans? Read on as we take a look at the two main types of lenders, and how they differ.
What do we mean by ‘traditional lenders’?
Traditional lenders tend to be banks or credit unions that provide additional finance to individuals and businesses. There are a few different types of traditional lenders, such as regulated institutions which are lenders that must adhere to government rules and regulations to ensure safe lending practices to protect the consumer. There are also long-established institutions which have been lending and providing financial services to customers for a long time, and have a track record when it comes to reliability.
Traditional lenders may also have physical branches like banks that create a personalised service with customised loan options. Generally, traditional lenders are trustworthy and established, so choosing to apply for a loan from them is advantageous.
What do we mean by ‘online lenders’?
Online lenders are a little different to traditional lenders, with one of the main differences being that they’re based online and do not have physical premises. Because of this, there are many lenders to choose from that can offer a range of loans, no matter your credit score.
These lenders are entirely based on a digital platform, which makes the application process faster and more convenient – meaning you can complete your application without having to leave the comfort of your own home. Whilst these lenders can be helpful for a range of different types of loans and loan amounts, it can be more difficult to determine whether they’re reputable.
How are they similar?
Both traditional and online lenders are the same in the way that they provide financial help for both individuals and businesses. Here are a few ways in which they’re similar:
- Credit scoring: Both types of lenders take your credit score into account when applying for a loan, and both will be recorded on your credit report when you apply for a loan with them.
- Loan terms and conditions: Both lenders offer a range of terms and conditions, and types of loans to choose from so you can find a finance option to suit you perfectly.
- Risk management: Both types of lenders assess the creditworthiness of the borrower to manage risk, allowing them to determine whether the borrower will be able to pay back the loan.
How do they differ?
Traditional and online lenders also have a few differences that should be considered when trying to find a loan to suit you. Here are a few of the most notable ways that they differ:
- Eligibility: This is one of the biggest differences. Online lenders tend to have more lenient eligibility requirements than traditional lenders. There are online lenders that offer loans for those with poor credit, whereas you’d struggle to be approved by a traditional lender without an average credit score.
- Interest rates: Online lenders tend to have higher interest rates than traditional lenders, this is because they have more lenient requirements and need to ensure they get their money back. To benefit from low-interest rates, a traditional lender would be best.
- Types of loans: Traditional lenders offer a range of loans in different amounts, like business loans, personal loans, and mortgages. The amount that online lenders offer may differ, and it may be more difficult to apply for loans of larger amounts.
- Approval time: The process of being approved for a loan by a traditional lender can take days or even weeks depending on the type of finance. Some online lenders offer funds that could make it to your account in as little as 24 hours.
Which is best?
When choosing which is best for you, there are a few factors to consider. If you have a good credit score, you could benefit from some of the best loan amounts and interest rates with a traditional lender. If you have a less-than-perfect credit score, you can still benefit from additional finance, but an online lender with more lenient requirements would be a better choice.
You should also think about the type of loan you need. If you’re looking for a personal loan or a mortgage, a traditional lender may be able to offer you the best deal. If you’re looking for funds to deal with an emergency, an online lender would be able to offer a fast approval rate.