Online Loan Providers Will Soon Have Stricter Loan Approval Criteria, And May Become More Expensive Too! | Credit Raters post

Online Loan Providers Will Soon Have Stricter Loan Approval Criteria, And May Become More Expensive Too!

29 Dec 2019
Approx Reading time: 3 minutes
  • Online lenders are not paying out enough return to keep investors happy, due to lower-than-expected profitability
  • Steps are being taken by online lenders to reject high-risk loan applications and an increase in the applicable interest rate is also likely.

For quite some time, fintech lenders have been the preferred choice for many borrowers looking for affordable personal loans, especially those who find it difficult to secure the same from banks due to tougher approval standards. Since fintech companies mostly operate online, the ease of access and fast processing times make them a quick source of credit.

However, according to experts, fintech companies have started to tighten their approval criteria or are charging a much higher interest rate compared to a few years ago. Companies like LendingClub Corp. are moving towards greater profitability to honor the commitments they’ve made to their investors.

This means that fintech companies are becoming more conscious about the loans they approve, with some preferring applicants belonging to higher-income backgrounds with an above-average credit score.

And this change in policy has already manifested in reality. Just last quarter, the average credit score accepted by personal loan lenders, as reported by PeerIQ, stood at 717, which is the highest to have ever been recorded. Also, the average income reported by borrowers stood at $100,000 per annum, also the highest ever recorded.

Now, the focus for fintech lenders has moved towards credit scores. Even this year, just 25% of all personal loans were given out to borrowers with a below-average credit score.

The Growth Of Fintech Lenders

After the financial crisis, banks had placed tougher approval conditions in order to avoid lending to high-risk borrowers. Such borrowers gave birth to a new market, which was quickly filled by fintech lenders, many of which operated through the internet. These lenders began accepting those borrowers who were being shunned by the banking system. However, now they are refusing them just as the banks did.

And LendingClub is the best example of this changing trend.

The company had started in 2006 as an online platform, helping borrowers find the most appropriate retail loan provider. Since online lenders do not carry many of the overhead costs that banks do, it made them very competitive and, hence, allowed them to offer a cheaper rate to their customers.

At that time, fintech companies promoted their services in a way that made them seem better than banks, especially since they were able to offer a more competitive rate. Also, while banks approved loans for only those applicants with a super-prime or a prime plus credit rating, fintech lenders appealed to those with a prime and near-prime credit rating. Now, over 60% of all borrowers in the fintech industry hold a prime or lower credit rating.

A Disappointing Situation

The problem is profitability. The loans being given out by fintech lenders are funded through investments, and these investments must generate a healthy return to satisfy investors. Unfortunately, the model that has been followed by fintech lenders for the past many years does not seem to be producing satisfactory returns for investors, at least not anymore.

For example, one investor at LendingClub was promised a return of up to 20% per year. However, the actual return received was around 4%. Even LendingClub has lost around 90% of its $8.46 billion valuations since its IPO back in 2014.

Hence, the solution is simple: charge a higher rate to those with a lower-than-average credit score, or reject loan applications carrying an intolerable level of risk. Loan approval rates at LendingClub have already declined by 17%. More fintech lenders are expected to follow suit in the years to come.

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Akbar Lashari

Akbar is a talented news editor who follows the consumer finance industry closely and has written for many famous news & educational websites such as Forbes.