What are Fintech loans and how are they different from traditional bank loans?

The fintech industry in India has seen an exceptional rise in recent years, especially after the pandemic. The fintech industry’s growth has been driven by innovative and technologically advanced products that increase customer acquisition and satisfaction. Fintech loans have gained considerable popularity in the country due to the ease and convenience of their use. 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 collateral or credit history. They are usually small loans and are intended for short-term use. Fintech loans can be used for a variety of purposes, such as debt consolidation, home improvement or financial emergencies. Fintech loans are alternative loan options that offer significant benefits to both banks and borrowers. Fintech companies are creating seamless customer onboarding and credit disbursement processes with technology-enabled, mobile-friendly platforms that can replace physical interaction with external lending applications.

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

What are traditional loans?

Traditional loans are offered using the conventional loan process. These loans are usually availed of by visiting the lender’s nearest branch and require human intervention to approve the loan application. Before approving a traditional loan, banks usually consider 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

• Conduct legal and valuation searches, if necessary

• Determining the loan amount

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The borrower must visit the branch in person 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 important differences between the two:

1. Application process:

The application process for fintech loans is usually faster and more convenient than the traditional bank loan process. Borrowers can apply for fintech loans through the company’s website or a mobile application and get approved in minutes. While traditional bank loans may require borrowers to visit a bank branch in person and complete a lengthy application process.

2. Requirements for credit points:

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 period is also shorter. This can make it easier for people with a limited credit history to get a loan. While traditional bank loans require borrowers to have a good credit score and a solid credit history.

3. Security:

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 such as personal loans and business loans can be used without collateral, but they come with a maximum limit on the loan amount.

4. Loan period:

Fintech loans are usually short-term loans and can range from a few months to a few years. While traditional bank loans can have a longer term, ranging from several years to several decades, depending on the type of loan and loan amount.

5. Interest:

Fintech loans generally have higher interest rates than traditional bank loans because the fintech borrowers have a limited credit history and/or a less-than-perfect credit score, and are therefore considered high-risk borrowers. Also, the convenience and speed of the fintech lending process can come at a price.

6. Repayment options:

Fintech loans often have flexible repayment options, such as automatic repayments and prepayments or foreclosure without penalty. In contrast, traditional bank loans may have stricter repayment terms and may require an advance payment fee.

7. Other fees:

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

What are the advantages and disadvantages of Fintech loans?

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

Benefits:

1. Convenience:

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

2. Availability:

Fintech loans are more accessible to people with limited credit histories or low credit scores, 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 Security:

Fintech loans are unsecured; Borrowers therefore do not need to provide collateral such as a house, gold jewelery 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 lower credit scores.

2. Limited loan amounts:

Fintech loans are small loans, which may not be enough for larger expenses such as buying a house or a car.

3. Lack of personal touch:

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

4. Limited use:

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

Conclusion:

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

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

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