Online loans offering easy and fast applications are some of the reasons why FinTech-based lending has taken off in the past few years. According to Fiserv, two-thirds of all personal loans borrowed in 2019 originated online.
But is this convenience the only reason why people borrow online? And are there any potential drawbacks to borrowing over the web? To help you understand your options, let’s compare some advantages and disadvantages of online loans below.
Advantage No. 1: Eligibility
In the past, payday cash advances were one of the few options people with bad credit could borrow. Along with pawn shops and cash-checking services, these cash advance payday loans have earned a bad reputation for high fees and short terms that can put pressure on your finances.
Through FinTech, you may find an alternative to payday loans when you have bad credit. As long as you meet their eligibility standards, you have a shot at applying for alternatives like lines of credit and installment loans for bad credit.
Advantage No.2: Personalized Care
The online world isn’t known for its warmth, but FinTech manages to marry the cold, hard efficiency of tech with the personalized care of customer service.
There’s always a person on the other side of the screen who is available to help, answering any questions you might have about the process. In many cases, you’ll even be assigned a loan manager who verifies your online application and reviews your cash loan contract over the phone.
Disadvantage No. 1: You Need Secure Access to the Internet
If you’re scrolling through this article using your home Wi-Fi, this may seem like this one belongs to the other advantages. But nearly 19 million Americans don’t have reliable access to the web. These borrowers would have to visit a library or Internet café to research and apply for cash advances online.
Unfortunately, there’s no guarantee these networks are protected against security risks. Anyone with a password can log on and potentially eavesdrop on any other user on the network.
Although there’s no guarantee this is happening on your library’s network, your branch will discourage you from managing your finances, as you’ll be sharing personal information you can’t afford to expose.
Disadvantage No. 2: Algorithmic Bias
Data-driven lenders use Artificial Intelligence (AI) to help review online applications quickly. At the underwriting stage, FinTech uses AI to ferret out people who don’t meet a lender’s eligibility requirements quickly.
It does this by comparing application information to the data provided by software engineers. If you match these data sets, you’ll be approved. If you don’t, you’ll be denied.
Algorithmic bias happens when engineers don’t account for real-world prejudices when feeding their AI information to fuel their functions. If they incorporate data from redlined neighborhoods—these are communities denied financial services because of their racial makeup — the AI learns to connect approval (and rejection) to geographic locations and skin color.
If the bias isn’t corrected, the AI falls into a feedback loop. It begins to create new data that supports these prejudices any time it denies redlined borrowers.
Like any decision in life, deciding to borrow money comes with pros and cons. It’s up to you to determine if one side outweighs the other.