When Should You Consider a Fintech Loan

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Nov 25, 2024

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Fintech companies are becoming more and more common in our day-to-day transactions. You may be using fintech products and not even realizing it. Companies like Zelle or Venmo are fintech companies. They operate completely online without brick and mortar offices or branches. Fintech loans are loans that are issued through these online only lenders.

Financial technology companies are often working with new types of financial products and that translates into lending as well. Fintech companies may use alternative data to determine credit worthiness in extending short-term loans, personal loans, and small business loans to borrowers.

In this article

Traditional loans vs. Fintech loans

Traditional lenders use the same set of criteria across the board to determine if potential borrowers are good candidates for lines of credit. Depending on the type of loan and the lender, there may be a little bit of wiggle room, but typically the data points are the same across the board.

Fintech loans operate under a different set of rules. They are not subject to the same scrutiny as traditional banks—this can work in your favor if you fall outside traditional lending criteria. These financial technology companies recognize that traditional data points are not the only data sources that can prove someone's creditworthiness.

How fintech has changed the borrowing game for businesses

Fintech lending has allowed small businesses access to funding without the harsh requirements of banks. Traditional banks often require years of financial records and proof of profit—which is a hurdle for many businesses, especially in the first few years. For business owners or entrepreneurs just starting out, obtaining capital through traditional routes is difficult. Cash flow is the biggest reason that small businesses fail. Financial technology companies realized that these businesses hold potential and started creating products to fill a gap in the lending marketplace. According to a survey completed by PYMNTS, 75% of small to medium businesses were more likely to choose a financial technology company over a traditional banking institution.

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Situations when you should consider a Fintech Loan

You need funds quickly

Fintech lenders operate differently than traditional financial institutions when determining eligibility. Bank loans typically require a loan officer to make lending decisions personally. This approval process can take days or weeks. Rather than using traditional data points to determine creditworthiness, fintech companies use artificial intelligence and algorithms to expedite the loan application process. Credit decisions and funding can be completed in a matter of minutes.

You don’t fit typical lender criteria

Traditional lending criteria uses credit score, income and debt ratios to determine creditworthiness. Fintech lenders often use non-traditional data sources to evaluate potential borrowers. Fintech loans are a helpful financial product for people who don’t have the credit history or income stability that traditional lenders like to see.

You want to borrow without collateral

Traditional banks are often more strict with lending for unsecured debt, because there is no collateral to ensure the debt is repaid. Fintech companies have allowed a wider borrower set to have access to unsecured debt in recent years. Fintech lenders use alternative data points to make lending decisions based on cash flow or payment history with phone bills, utility bills, and rent payments—not just a credit score. For borrowers seeking unsecured debts, fintech loans may be easier to obtain.

You want the convenience of an entirely online process

Unlike traditional loans, fintech platforms operate all online, including the application and approval process. This is great for borrowers that live in more rural locations or those that are unable or don’t want to meet in-person at a bank during business hours.

Borrowers are no longer limited to the financial institutions located within a certain radius of them. You can take advantage of the best rates and terms regardless of your location.

You’re looking for a non-traditional loan

Traditional banks offer traditional lending products like credit cards, personal loans and small business loans. Fintech companies often have nontraditional financial products like peer to peer lending options and micro loans. Additionally, some lenders may offer non-traditional repayment plans for small business loans and entrepreneurs.

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Precautions to take when applying for a fintech loan

Banks and credit unions are insured by government organizations like the FDIC and the NCUA. Consumer financial protection bureau laws implement fair practices and transparency guidelines for traditional lenders. Unlike traditional banks, fintech companies aren't subject to the same rules and regulations. Customers don’t have the same level of protection when using financial products from fintech companies.

Financial technology firms have created opportunities for borrowers but unfortunately, it has also opened the door to new types of fraud and scammers. Oftentimes scammers will duplicate logins, send fake emails, or prompt you for personal information to gain access to your accounts and personal information. Report any suspicious activity to your fintech lender. Check with your fintech lender about how they use and store data, protect against fraud, and keep your accounts safe.

How to choose the right fintech Lender

Similar to choosing a traditional lender, you should take the following steps to find the right fintech lender for you.

Determine your loan needs. Not all lenders specialize in the same type of loan. If you are looking for a small business loan, you may want a fintech lender that works with entrepreneurs or startups.
Compare costs. Interest rates will vary from lender to lender. Check out the other fees associated with the loan like origination fees and any prepayment fees. Shop around for the best rates.
Eligibility. Determine what criteria your lender will be evaluating your creditworthiness on. Make sure you can provide documentation as proof of your ability to repay the loan.
Application process. Fintech lenders operate exclusively online. You should be able to complete the entire loan application process with a computer and internet connection.
Customer support. Hopefully your loan approval process will go off without any problems. On the small chance you do need to talk with someone, check and see how easy (or difficult) it is to get a hold of a customer support representative. If you need help, you want to make sure you can reach a real human to talk to.

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The bottom line

Fintech loans are credit products available through online-only lenders. Process is streamlined and can offer quick turnaround times. Thanks to algorithms and artificial intelligence helping to accelerate the decision-making process.

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Holly is a freelance writer who recognizes that there isn’t a one-size-fits-all approach to personal finance. She is passionate about entrepreneurship, women in business and financial literacy. When she is not working, she is testing out new recipes, tasting the newest Trader Joe’s finds or binging the latest true crime podcast. She resides in Utah with her husband, two daughters and dog, Max.

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