Financial technology, or better known as fintech, is an industry that has seen an unbelievable growth in India in the last few years, especially after the Covid-19 pandemic. This industry is run by innovation and technology. This rapidly growing industry encompasses not only e-commerce and cryptocurrency, but also Netbanking, investment, insurance and a vast array of services, including offering fast and quick credit to those with limited credit history.
What Is Fintech Lending
Fintech lending is very popular in the fintech domain, as it is less time-consuming and also reduces physical constraints imposed by physical documentation, which is widespread in traditional lending.
These are mostly short loans given out for a short period of time and can be accessed through mobile apps or websites. Online lenders usually offer fintech loans, mostly without collateral or any check on the borrower’s credit history. Fintech loans are usually preferred for various purposes, such as, house renovation, emergencies, mortgage, credit debt repayment, and so on.
Types Of Fintech Lending
Fintech loans include different types of working models. Here are the four most commonly used fintech lending models:
P2P Lending: Peer-to-peer (P2P) lending in fintech refers to the model where people can borrow money for loans directly from an individual, and not from a bank or a financial institution. Basically, the fintech platform allows people or businesses to be connected to investors who are willing to lend money, in exchange for a nominal fee. CRED Mint, FairCent, Mobikwik Xtra, are some of the P2P lending platforms in India.
Investor Loans: In this model, some fintech companies source loans and sell them, rather than providing loan themselves. This type of loan is not backed by any collateral. For instance, Better Mortgage, a fintech mortgage lending company, pools customers who are looking for mortgage loans. It shortlists them and sells mortgages to different banks, such as Wells Fargo or Citibank etc.
Mortgages: These kinds of mortgages are very similar to traditional mortgages, but they are more convenient because of less physical barrier and less time constraints.
Business Loans: Fintech companies give out business loans to small businesses to help them accumulate their capital needs for growth. Most small businesses are not eligible to take loans from traditional banks due to the high-risk factor associated with their business.
Traditional Loans
Traditional loans are loans taken from banks or financial institutions, which are authorised to disperse loans. Typically, these would mean scheduled commercial banks or non-banking lending institutions authorised by Reserve Bank of India (RBI) to give loans to borrowers. Such kind of loans are disbursed taking into account factors, such as the borrower’s credit history, capacity to repay, any collateral (if required), and typically involves a lot of documentation.
The process usually involves, among others
1. Verification of KYC information
2. Customer’s credit score and history
3. Customer’s income and an estimate monthly expense
4. Legal background check
5. Deciding on the loan amount
Differences: Fintech Loans Vs Traditional Loans
One might consider that borrowers prefer fintech loans over traditional loans because of the requirement of minimal documentation and the lesser amount of time it takes for the loan disbursal process. But there’s more to it. Here are the some of the key differences between the two.
Application Process: One of the reasons why customers are leaning towards fintech lending is the ease of the application process. Customers usually apply for such loans through the company’s website or mobile app, which typically takes a few minutes. In contrast, traditional loans could take up to a fortnight or a month for the loan disbursal process from the time of application.
Credit Score: Fintech companies usually run a soft credit check on the customer, as the loan amount is usually smaller, and the tenure is comparatively shorter. They use alternative evaluation measures, such as payment history. It makes obtaining loans easier for people with limited credit history.
Collateral: Fintech loans are usually unsecured, meaning that they can be obtained without any collateral. In comparison, obtaining loans from traditional banks may require collateral, especially for bigger loans. In traditional banks, there’s a maximum loan limit on unsecured loans.
Tenure: Fintech loans are usually short-term, ranging from a few months to a few years; conventional loans taken from banks have longer tenures that can span over several years to even decades, depending on the loan amount.
Rate Of Interest: Fintech platforms are known to apply a higher rate of interest on their loans compared to conventional bank loans, as these loans are given on limited credit history, and are, therefore, considered risky.
Repayment Options: Fintech loan repayment options are mostly flexible, and have features, such as automatic repayments, prepayments, and foreclosure charges. Conventional banks may charge for foreclosure or prepayment.
Customer Service: Customer service in fintech platforms can be more convenient given the presence of chatbots and AI tools; one does not necessarily have to physically visit the bank if they have any query, which is typically not the case with traditional banks.
