Online title loans are turning out to be more reasonable than the traditional alternative. More lenders are available online as they realize the inevitability of the switch from traditional to contemporary mediums of lending. FinTech or financial technology is also ushering in an era of new age lenders who are not confined to the limitations of traditional lending practices. FinTech is surely transforming auto title loans. The next question is if it can lower the cost of online title loans.
The Steep Rates Of Interest
Title loans usually have around 400% APR. Many lenders offer a lower rate of interest. Many levy a higher annual percentage rate. According to most assessments, payday loans carry a higher rate of interest than title loans. In a few states, payday loans can have an APR of 600% or more.
These are not viable or even practical for borrowers. The difference in rates of interest between in-store and online title loans has been modest. The rates have not been worlds apart. That is beginning to change as financial technology delves deeper into the profile details of a borrower to ascertain the appropriate lending rate.
The Limitation Of Traditional Loans
Banks and traditional financial institutions have failed to serve the average person because of their overreliance on credit scores. This is primarily why title loans are so relevant.
Many times, borrowers simply do not have a choice but to opt for title loans since banks turn them down. They tend to serve the prime customers. Nearly half of all Americans do not have a credit score around seven hundred. More than two-fifths of the population have a credit score well short of six hundred. Millions do not have any credit history.
The Impact Of FinTech On Online Title Loans
FinTech has diverse implications for online title loans. First, new age lenders are making their presence felt in the sector. These lenders are not bound by legacy and hence the inherent shortcomings. These lenders are leveraging technology to reach out to potential borrowers and serving the subprime customers. For example, Titlelo Title Loans, a startup in Florida, qualifies their applicants in real time to minimize the costs of having employees and a brick and mortar location.
The objective is to make their financial products and services relevant to the average person, who may not have much saving or a great credit score but can indeed repay a relatively small loan amount in the short term. By properly assessing the profile and understanding the ability of a borrower to repay, state of the art lenders can mitigate their risks and hence charge a reduced rate of interest while still offering the loan amount as a traditional lender.
FinTech can help lenders focus on technology that tracks spending habits, variable income and ascertain if the borrower can actually repay the loan. Lack of saving is not a reason enough to believe that a borrower cannot repay. Likewise, a credit score is definitely not a true indicator of creditworthiness.
Young adults do not have a long credit history. They have loans but are also earning. Their credit score may be nowhere near the seven hundred that the banks are looking for. Yet, these young people can very well repay a thousand dollars or a few thousand in a short span of time.
FinTech May Reduce Interest Rates
FinTech also paves the way for a considerable range of interest rates that can be determined by the profile of the borrower. It is near impossible for analog methods to compute for all the variable factors that are obvious when one assesses several borrowers.
Every borrower has a certain need, there is an income and a monthly expense, there may or may not be any saving, there might be limited or substantial scope of cutting the costs to facilitate a repayment and other factors will play a decisive role in determining eligibility. Likewise, the rate of interest can be influenced using relevant analysis.
It is not necessary for all borrowers of title loans to pay a 400% APR. FinTech has opened up a vast range of anywhere from 80% APR to over 200% APR. Very few lenders relying on FinTech are charging anywhere close to 400%. Most have capped their rates below 300% APR.
The Immediate Future Of Lending Online
Various forms of technology and its possible implementations will change other lending sectors as well. Competitiveness will have a pleasant impact on the costs of online title loans from the perspective of the borrower.
Lenders will be able to mitigate their risks. The first time borrower with whom a lender has no history will remain a risk but it can be contained with a multi-pronged assessment using financial technology.
The pool of lenders is no longer limited geographically or with the resources available. There is scope for further improvement that will make the whole application and approval process a cakewalk. Borrowers can expect considerably reduced rates of interest. Repayment history will qualify them for even better rates.
Financial facts, from income to spending habits, increasing savings and other essential information will be taken into consideration and FinTech algorithms can effectively determine eligibility, loan amount, rate of interest, and repayment term.
Many borrowers are thrust into a cycle of debt because of stringent repayment terms. Very few people in financial distress can expect to resolve it entirely in fifteen days to thirty days. One needs more time and FinTech is facilitating that. Online title loans may or may not replace traditional practices entirely but they are certainly more reasonable and more lenders will induct financial technology in the near future.