Depending on who you ask, online lending is either rainbows and unicorns or gloom and doom. The burgeoning business has risen from nothing more than a faint cry from consumers for alternatives to conventional bank loans; its impressive 700% rate of growth between 2010 and 2014 showed obvious signs of major lenders meeting the needs of many individuals from diverse backgrounds in terms of credit use.
Consumers fell fast and hard for the ease and convenience of online lending platforms from the likes of Lending Club, OnDeck, Prosper, and SoFi, each with similar appealing mantras promising to unbank the financial marketplace.
While growth in the industry has remained relatively strong in recent years, online lending has taken a slight hit in terms of popularity among the masses.
Not so Great News
The media has played a significant role in questioning the viability of the online lending marketplace, spearheaded by some less than ideal news for one of the most prominent platforms in the space: Lending Club.
The behemoth of an online lender is viewed often as the eBay for personal loans since it matches individual consumers with investors willing to lend a financial hand.
The theory behind Lending Club’s early success was the fact that loans were made available for a variety of reasons, and because no big bank was involved, interest rates charged to borrowers could be less than traditional lending products. Consumers, and investors, were madly in love.
Unfortunately, Lending Club took a nosedive when it was uncovered that some of its practices in providing loans – and ultimately paying investors – were not on the up and up.
In response to the outcry from consumers, competing big banks, and ever-watchful regulations, the company’s leader ultimately stepped down.
Since that time, the online lender has shown clear signs of struggle with a declining stock price, fewer originated loans and ongoing scrutiny by the press.
The Rise of Alternatives
Online lenders aren’t remotely near their peak in the market, but a domino effect seemed to ripple through the unbanking industry after the news of Lending Club’s missteps surfaced. Other major lenders reported stagnant earnings, assumedly based on lowered confidence from both sides of the lending coin.
While time will tell how personal loan lenders thrive in a tumultuous time in the industry, a rise in alternative lending companies has quietly taken place.
The majority of well-known online lenders focus on the individual personal loan market, offering term loans between $1,000 and $35,000 at competitive interest rates, and repayment terms ranging from one to five years without any need for collateral.
But more secured loan providers, like car title lenders, and micro-loan providers are showing signs of growth as an alternative to conventional, but non-traditional, online personal loans.
Each utilizes a technology-based platform to get borrowers approved, and some steer clear of run of the mill credit requirements to help better serve the truly unbanked consumers in need. This is one trend that has the potential to climb in upcoming years, especially as large, public online lenders tighten their requirements and face more scrutiny from regulators.
This is one trend that has the potential to climb in upcoming years, especially as large, public online lenders tighten their requirements and face more scrutiny from regulators.
There remains a pressing need for alternatives to traditional bank products, and the financial technology industry is making waves of disruption to bring feasible options to the market.
However, given the wild frontier that was online lending in its early days, many consumers are wary of how products like unsecured personal loans, collateralized loans, or micro loans truly benefit them in the long run.
To save face, major players in the online lending game will have to cater more to consumers underlying needs: the ability to forego a visit to a bank branch office and the lengthy application process that comes with it, transparent and reliable funding with interest rates that aren’t through the roof, and a sense of security that their loan provider will be there for the long haul.