What Are Fintech Loans And How Are They Different From Traditional Bank Loans?

The fintech industry in India has seen an exceptional surge in the last few years, especially after the pandemic. The fintech industry's growth has been driven by innovative and technologically advanced products that boost customer acquisition and satisfaction. Fintech Loans have gained significant popularity in the country due to the ease and convenience of availing them. This article explains what Fintech Loans are and how they differ from Traditional Bank Loans.

What Are Fintech Loans?

Fintech Loans are offered by online lenders, often without any collateral or credit history check. They are typically small-amount loans and are intended for short-term use. Fintech Loans can be used for a variety of purposes, such as debt consolidation, home renovation, or financial emergencies. Fintech Loans are alternative lending options that offer significant advantages to both banks and borrowers. Fintech companies create seamless customer onboarding and credit disbursement processes with tech-enabled, mobile-friendly platforms that can replace physical interactions with remote loan applications.

Fintech companies use advanced technology to streamline the lending process, making loan availing faster and more convenient for borrowers. Many fintech lenders offer loan applications that can be completed online through their authorised website or a mobile app, allowing borrowers to apply for and get the loans disbursed quickly.

What Are Traditional Loans?

Traditional Loans are offered using the conventional lending process. These loans are typically availed by visiting the lender's nearest branch and require human intervention to approve the loan application. Prior to approval of a traditional loan, banks typically review the following factors:

• Verification of the customer's Know Your Customer (KYC) information

• Evaluation of the customer's credit score and credit history

• Assessment of the customer's income

• Analysis of the customer's monthly obligations

• Conducting legal and valuation searches, if necessary

• Determining the loan amount

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

The borrower needs to visit the branch personally to submit the required documents and receive the loan disbursement.

How Do Fintech Loans Differ from Traditional Bank Loans?

While fintech loans and traditional bank loans serve the same purpose, there are several key differences between these two:

1. Application Process:

The application process for fintech loans is typically faster and more convenient than the traditional bank loan process. Borrowers can apply for a fintech loan through the company's website or a mobile application and receive approval within a few minutes. Whereas traditional bank loans may require borrowers to visit a bank branch in person and complete a lengthy application process.

2. Credit Score Requirements:

Fintech companies generally use alternative data sources, such as payment history, to assess a borrower's creditworthiness. In many cases, they only run a soft credit check as the amount is often smaller, and the loan tenure is also shorter. This can make it easier for people with limited credit history to obtain loans. Whereas traditional bank loans require borrowers to have a good credit score and a solid credit history.

3. Collateral:

Fintech Loans are often unsecured, meaning they do not require collateral such as a house or car to secure the loan. In contrast, traditional bank loans may require collateral, especially for larger loans. However, traditional bank loans like personal loans and business loans can be availed without any collateral, but they come with a maximum limit on the loan amount.

4. Loan Tenures:

Fintech Loans are typically short-term loans and may range from a few months to a few years. Whereas traditional bank loans may have longer tenures, ranging from several years to several decades, depending upon the type of loan and loan amount.

5. Interest Rates:

Fintech Loans generally carry higher interest rates than traditional bank loans because the fintech loan borrowers have a limited credit history and/or a less-than-perfect credit score, and hence are considered to be high-risk borrowers. Besides, the convenience and speed of the fintech lending process may come at a price.

6. Repayment Options:

Fintech Loans often have flexible repayment options, such as automatic repayments and prepayments or foreclosures without penalty. In contrast, traditional bank loans may have stricter repayment terms and may charge a prepayment fee.

7. Other Charges:

Fintech Loans typically come with higher charges for late payments or missed payments than traditional bank loans.

What Are the Pros And Cons of Fintech Loans?

Like any financial product, fintech loans have their pros and cons. Here are some of the benefits and drawbacks of fintech loans:

Pros:

1. Convenience:

Fintech Loans are more convenient than traditional bank loans. Borrowers can apply and receive loans quickly and easily without visiting a bank branch in person.

2. Accessibility:

Fintech Loans are more accessible to people with a limited credit history or a low credit score, as fintech lenders often use alternative data sources to assess creditworthiness.

3. Flexibility:

Fintech Loans have more flexible repayment options than traditional bank loans, such as the ability to make extra payments without penalty.

4. Speed:

Fintech Loans can be approved and funded quickly, sometimes even within hours or minutes, making them a good option for people who need money quickly.

5. No Collateral:

Fintech Loans are unsecured; hence the borrowers do not need to provide collateral such as a house, gold jewellery, or a car to secure the loan.

Cons:

1. Higher Interest Rates:

Fintech Loans generally have higher interest rates than traditional bank loans, especially for borrowers with a lower credit score.

2. Limited Loan Amounts:

Fintech Loans are small-amount loans, which might not be enough for bigger expenses like buying a house or car.

3. Lack of Personal Touch:

Fintech Loans are fully automated, so the borrowers may not have the opportunity to ask questions or clear doubts about the loan.

4. Limited Recourse:

Fintech lenders may not offer the same dispute resolution options as traditional banks, which can make it harder for borrowers to resolve issues or complaints.

Conclusion:

Fintech Loans are a relatively new option for borrowers that offers several benefits over traditional bank loans, such as convenience, accessibility, and flexibility. However, they also come with some drawbacks, such as higher interest rates and limited loan amounts. Whether a fintech loan or traditional bank loan is the best option for you depends upon your needs and financial situation. As with any financial decision, it is crucial to research all options and compare rates and terms before making a decision.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.