With the big issues that emerged during and after the financial crisis of 2008, there were problems with lending that led to many people turning to online lenders for loans. Many people didn’t trust the banks in the same ways they once did, and they wanted another option for loans for business or personal finances.
But how has big data influenced lending practices? Well, let’s take a closer look at this situation to find out.
Turn to Online Lenders
So many people were unhappy with how the banks handled situations in the past, but one thing makes people turn to online lenders: not having to go to a bank’s branch office. Many consumers don’t like having to talk to a lending officer at a bank and justify their business or personal needs. With the use of online lenders, potential loan recipients can handle all of the processes online without going into a local branch or seeing another human being in the process.
This makes them feel more comfortable, and investors who poured a lot of money into online lending found that this is a big payday for them. However, there are some setbacks to this switch. The biggest is that you have to be nearly perfect with your borrowing and credit history.
Issues with Online Lending
Though there seem to be many positives that come with a new boost of online lenders, this doesn’t mean that it is always the best option. With very expensive start-up costs and no good ways to get that money, banks tend to have the upper hand because they already have the capital and a reputation for handling loans.
Even with a tainted reputation after the financial crisis, many people typically feel better going into a bank to get a loan to ensure that the transaction is safe and secure. It also makes them feel like the meeting was official and that they will receive the money they need. Online transactions don’t come with that same confidence in customers.
Benefits of Online Lending
However, there are also some good things that come with it. One of the main benefits is how they use their big data. Online lenders use their big data to underwrite the higher credit risk in several ways that credit scores wouldn’t normally do. This allows them to better predict a default loan probability from information other than a credit score.
It also makes them able to take on customers that would normally not be able to get a loan from a traditional bank. Because of this, they have a large number of people who are taking out loans, which means they are making money off of interest from each of those loans. They can also use this data to help get their advertisements to people who would want their services.
This means that online lenders can gain a longer reach to entice those who would not usually think to go to a bank to get a loan, but would consider doing it online. This ensures that more people can get the business loan they need with less work on their part to boost credit score before they can start making money.
Differences with Big Data
As you can see, with big data being used to tell if the person looking for a new loan would default without using just their FICO score, this has made it possible for many more people to be able to get their businesses off the ground within less time.
With banks offering vague borrowing terms, which tend to lead to a longer process for receiving the money, many people were frustrated with the way that things were going. With the offering of online lenders being able to use big data to tell if someone was a good risk and being able to get you your money faster, it has changed the way that many businesses get new loans.
Plus, with many people still recovering from the crisis, there are some who have yet to boost their credit score high enough to qualify. However, getting the money they need to start their business, they could be in a much better financial place. Websites like Become.co, people can get the money they need for their business through an online platform that uses big data to calculate if you’re qualified.
Final Thoughts
Big data is not something that everyone understands, but in the technological world we live in today, there are ways to use it within lending practices. As we look through how the use of big data has influenced lending practices, online lending has become much more prevalent, but it has also caused banks to step up to keep up with these websites and offer better options for customers too.
So, the use of big data has had a direct and indirect influence on both traditional banks and online lenders, but with all signs pointing toward giving customers what they need, it all looks uphill from here.