The Myths and Realities of Online Lending
In 2021, Ipsos Mori conducted a survey that revealed a shocking reality: about 90% of people in England felt they had learnt very little about money and finances in school.
The findings of this survey go to show poor understanding of money and money matters is a grim reality of the world we live in. Given the ongoing uncertain economic environment, the importance of financial education and becoming financially literate in today's world cannot be overstated.
Not learning or fully grasping financial concepts in early years can negatively impact financial decisions as an adult. People who don’t understand how money works can run into debt and put their financial health at risk. At the same time, not being financially literate promotes the spread of financial misinformation like common myths and misconceptions.
After savings and credit cards, digital lending or online lending is a hot topic among working professionals. However, the way digital lending works is not completely understood, and there are multiple misconceptions surrounding it, preventing individuals from taking advantage of its benefits.
Are you confused about online lending? If you want to dispel the common myths and discover the realities of digital lending, then this article is for you.
Myth #1: Anyone Can Get a Loan Through Online Lending
The Reality:
Contrary to common belief, online lending companies are not more lenient in lending money than other lenders. Like banks and other traditional financial institutions, digital lenders too check your credit history and score to determine your creditworthiness.
The process of assessing your creditworthiness for little loans or mortgage loans online may slightly differ from regular lenders, as they prefer relying on advanced algorithms and machine learning models. Using these learning models and algorithms, online lenders assess whether or not loan applicants will be able to repay, in turn protecting the lender's interests and safeguarding the applicants from unsustainable debt.
Myth #2: Online Lending Companies Are Fly-by-Night Operators
The Reality:
It’s natural for the unaware to have a fleeting feeling about something they’re not familiar with. Digital and online lenders are a part of modern-day financial reality and are here to stay.
All online lending activity and offering credit facilities to people in the UK needs to be authorised by the Financial Conduct Authority (FCA). You don’t need to worry about unreliability, as most online and digital lenders follow FCA’s minimum standards and rules.
This makes online lending companies established and legitimate lenders with a large and thriving client base.
Myth #3: Online Personal Loans Damage Your Credit Score
The Reality:
Any lending application or credit transaction you make automatically gets recorded on your credit file. However, it’s far from the truth that personal loans and short-term loans will permanently damage your credit score and future creditworthiness.
One mistake that applicants should avoid making that lowers their credit scores is making numerous pointless applications. The best way is to find out your eligibility before applying for a loan. Once you are approved for the loan and begin making timely and complete repayments, any minor negative impact on your credit score should vanish within a few months.
Myth #4: Online Lenders Are Just a Passing Phase
The Reality:
Digital lending companies are leading the new wave in the financial services and fintech sectors. Online lenders in the UK and across the globe have been successfully regulated and are demonstrating their viability for the long haul. The lending rates may fluctuate from time to time, but these lenders continue to follow and improve fair and ethical practices, including their collection methods.
Despite the current economic state, the online lending market plays a pivotal role in the financial service sector. Backed with a proven and successful record, digital lenders will continue to exist and contribute to the growth of the financial services industry.
Myth #5: No Credit Card? No Credit History! No Loan!
The Reality:
This is a popular misconception that people have about credit scores. While it can be difficult to build a credit history when you don’t own a credit card, it’s certainly not impossible.
It’s a fact that credit card companies report your payment and credit activity to credit bureaus. Keeping good credit habits like maintaining a low credit limit and paying your bills regularly and on time adds up to a good credit score. Likewise, a bad credit score is a result of defaulting on payments or always spending close to your credit limit.
But a credit card alone will not fetch you a credit score; there are alternatives available.
There are other options through which your payment activity is reported to a credit rating agency. Rent, one of the biggest expenses on your monthly paycheque, can reward you by building your credit score. Another way is to become an authorised user on your family member’s credit card.
Keep in mind that your credit score is a complex and dynamic number determined by a number of factors. It’s always far quicker and easier to accumulate bad credit than to build good credit.
In Conclusion
The online lending business is quite large and more established than it’s perceived. While you cannot pinpoint a definite number of online loans or clients, one thing is for certain—it's the fastest-growing lending channel in today’s day and age.
Myths and misconceptions stem from false preconceived notions and beliefs. Only a good understanding of money and money matters can help people become wiser and more informed.
