FinTech Lending Has Arrived, But Be Cautious – Remember The Mortgage Meltdown's Lessons

Access to credit for tens of millions of Americans was one of the casualties following the mortgage meltdown and financial crisis that began in 2008.

It took years for the U.S. economy to claw back to normalcy, for the housing market to recover and for consumer spending to resume to pre-crisis levels. A banking industry clampdown on credit and toughening of standards for mortgage and other loan underwriting was a significant factor in the nation’s slow economic rebound. The lessons learned from the mortgage crisis continue to impact many consumers today when they apply for credit.

A new growth area in the lending industry is redefining the process and standards for acquiring everything from small installment loans to large lines of credit, college loans, and even mortgages. Built almost completely around online platforms and non-traditional underwriting standards, the Financial Technology industry – or “FinTech” – has rapidly made access to credit much easier for millions of Americans.

For people with stable financial profiles, steady income, and sensible budgets this is not a bad thing at all. Companies such as SoFi (Social Finance), Ally, Prosper, Lending Club, Elevate Credit, and Avant have developed online platforms that allow consumers to apply for loans up to $35,000 through a web-based form. Credit decisions can be rendered in a few hours – with funds delivered electronically in as little as one day.

Yet the same cautions apply for any consumer or household where debt problems and budgeting have been a challenge or threat to financial well-being.

Most significantly, the underwriting process for these companies is different than the typical credit scoring decision based almost exclusively on FICO (credit) score and debt to income ratios. FinTech lenders have created algorithms that use other data and information to predict borrower performance and assign creditworthiness. This includes things like current job status and employment history; education level and where borrowers went to school; rental and homeownership status; and most importantly – current income and projected or predicted future income based on these other factors.

Debt to income is also very important as are total assets. The bottom line, however, is that the actual FICO score plays a very limited role, or in some cases none at all, in the credit decision. The formulas these companies have created are based on statistical predictability, mathematics, and also behavioral patterns based on research.

FinTech lenders say they are experiencing a lower rate of default than traditional lenders because of their more comprehensive – yet at the same time, much more forgiving – method of underwriting.

Huge investments have poured into the industry from private equity firms and venture capitalists. FinTech is growing quickly and the cash being invested into the industry is creating massive pools of funding for loans.

But budget-conscious consumers should be cautious and aware, easy access to credit can mean an easy path to trouble. 

With loan decisions based on factors other than FICO scores, there is a high probability that borrowers considered subprime or not credit worthy by traditional standards will qualify under the different underwriting criteria used by many FinTech lenders.

Of course, there’s a price for getting access to credit when it might otherwise be denied--high interest rates. Indeed, the interest rates for borrowers who qualify for consumer installment loans from the category of FinTech lenders can be as much as 35 percent or more.

This type of financial assistance may seem like a good solution to a short-term problem for items such as auto or home repairs, a large medical bill or other unanticipated expenses. However, that kind of debt burden on even a single loan is enough to potentially disrupt an entire household’s long-term finances.

As always, information and awareness are the best tools for consumers before deciding to pursue any kind of credit. 

Shop around and explore as many FinTech lenders and websites as possible before deciding to go ahead with an application. Understand the terms of the loan exactly – especially the interest rate – but also repayment terms, possible penalties, impact on credit scoring, and how the loan will be repaid. Many or even most FinTech lenders require automatic bank drafts to ensure timely repayment.

Having new options for accessing credit can be a valuable opportunity for consumers with stable finances and smart budgeting habits. The ease of approval for a loan with revised underwriting criteria, however, can be a curse as much as a blessing if consumers fail to gather all the facts or practice irresponsible debt management.

Steve Trumble is President and CEO of American Consumer Credit Counseling in Newton, Mass.