Digital lending takes traditional loan management and digitizes it. It’s a massive industry, with an estimated global value of €10.8 billion and growing.
However, there’s a lot that goes into it, and both investors and borrowers can access various benefits through digital lending solutions.
Let’s explore everything you need to know about digital lending and how it’s shaping the future of financing.
Digital Lending Explained
Digital lending is the process of offering loans online through websites or mobile apps. Technology automates and speeds up the loan application, approval, and disbursement processes.
This means investors can quickly apply to fund loans online – a process that can take minutes.
Controlled digital lending is convenient, it often requires less paperwork, and can vastly improve efficiency in lending compared to loans from traditional financial institutions. The cost of digital lending can also be 40% lower, which means loans can be made more accessible and affordable.
Digital lending opens up a whole new world of opportunities for investors looking to fund loans. Not only is this investment process a lot easier when it’s all done online, but it also means various new online loan investment opportunities exist.
Evolution of Digital Lending in the Financial Industry
Digital lending business models have transformed the financial industry.
It all started with simple online loan applications. However, as technologies have improved, digital lending has become more advanced and more automated.
For example, automated credit scoring and instant approvals are now common. Digital platforms can quickly establish risk exposure and control all areas of lending management.
The global digital lending market is growing fast, valued at €10.8 billion in 2023 and expected to reach €66.8 billion by 2032. This clearly shows the increasing demand for quick, convenient, and accessible loans through digital platforms.
Traditional Lending Methods vs. Digital Lending Platforms
Traditional lending methods involve applying for loans through banks or credit unions.
This process often requires visiting a branch, filling out paperwork, and waiting days or even weeks for approval. Credit decisions are typically made using conventional credit scores and financial history. The process is time-consuming and often stressful.
Digital lending platforms streamline the loan process by allowing borrowers to apply online and investors to have more control over their portfolios. They use advanced algorithms and big data to assess creditworthiness, often providing instant approval.
Digital lending involves minimal paperwork, and the funds are usually dispersed faster. It’s a much more convenient, accessible, and efficient approach to taking out a loan.
The Lending Process
Digital lending follows a very similar process to what you’d experience in traditional banking. However, the bulk of this is automated.
While each lender might operate slightly differently, here are the typical steps involved in a digital lending process.
Application
You start with an online application.
Borrowers need to provide their personal and financial information. This is done by filling out a form through a website or mobile app and often requires documents to be submitted.
If loans are funded by investors, this information is made available to potential investors to help them understand the risk associated with each loan.
Verification
Once borrowers have applied, the lending platform verifies their information to ensure the data is accurate and to assess their creditworthiness. This typically includes automated identity, income, and credit history checks.
Again, the verified information is highly valuable for investors to ensure they understand exactly who they will be funding.
Credit Assessment
As is the case with any lender, digital lenders need to evaluate borrowers’ credit risk. They’ll do this using advanced algorithms and big data.
Credit risk assessments can use various factors, like credit scores, payment history, and other areas of an applicant’s financial behavior.
By gathering a more holistic overview of a candidate’s creditworthiness, loan investors have a better picture of the risk associated with funding different loan options.
Approval
Based on the credit assessment, the platform decides whether to approve the loan. This will typically involve a custom loan offer with a loan amount and interest rate based on the borrower’s credit history and financial position.
If we’re looking at a P2P digital lending platform, then this is the step where investors decide to finance the loan. Investors do this by assessing all available information about the borrower and deciding whether to approve and fund their loan request.
Agreement
If the loan is approved and funded, borrowers can review and accept the loan terms online.
Important details like interest rates, repayment schedules, withdrawal fees, and any extra fees will be outlined here. The process should be fully transparent.
Disbursement and Repayment
When the agreement is signed, the loan amount is disbursed.
Funds are usually transferred directly to the borrower’s bank account. This can happen almost instantly or within a few hours.
Then repayment is managed through automatic scheduled payments. Borrowers can track their payment schedule and balance via the lending platform’s app or website.
All of this is managed by the online platform that facilitates the loan. Investors are then repaid via the lending platform based on their investment.
Access to Loans
Beyond convenience, there are a few key reasons why so many people support digital lending. Here are some of the main loan access benefits that digital lending offers.
Wider Reach
Compared to traditional banks, digital lending platforms have a broader reach.
People in remote areas can easily access them, and there’s no need to visit bank branches to apply for loans. This means more people can access financial services.
Digital lending also means a lot more young people are interested in taking out loans. For example, 84% of people aged 18 – 29 are happy to grant access to their banking data to secure a credit or loan.
For investors, greater access to loans means more opportunities to invest in these financial instruments. This can help any investor vastly diversify their portfolio.
Faster Approval
Digital lending is far more efficient than traditional methods. Thanks to automated processes and real-time data verification, users can fund or access loans almost instantly. Any administrative processes are swiftly managed by the online platform, which makes investing or borrowing loans far more efficient.
This has totally changed the financial world, with people now expecting online loan access to be as convenient as ordering food.
Flexible Criteria
Compared to traditional banks, digital lenders often use more diverse criteria to establish creditworthiness.
Traditional credit scores aren’t the only deciding factor, which can help people with low credit scores secure loans. As an investor, these more flexible criteria provide a deeper understanding of each borrower’s financial position. This will help you make more informed decisions on which loan products to finance.
Types of Loans Available
A wide range of loan types are available through digital lenders. Here are some of the main ones.
Peer-To-Peer Loans
Peer-to-peer (P2P) loans, also known as crowdlending, connect borrowers with individual lenders through an online platform.
These loans often have flexible terms and can be easier to obtain than traditional loans. P2P lending benefits both borrowers and lenders with potentially lower rates and higher returns. This is a great way to connect an investor base with businesses or individuals seeking financing.
Personal Loans
Personal loans are the most common on digital lending platforms. These loans require no specific purpose and are often focused on smaller amounts. The application process is fast, and funds are usually dispersed very quickly.
Business Loans
If you’re starting or growing a small business, you can apply for digital loans. These loans can be used for things like working capital, business expansion, or purchasing equipment.
P2P platforms provide an excellent solution to entrepreneurs looking for an alternative business funding route. Instead of applying for business capital through a bank, you can raise funding from people with a genuine interest in your business. To prove just how popular this is, business loans make up 55% of the P2P market share.
As an investor, this also opens up some really exciting and interesting opportunities to invest in businesses – whether they’re established or just starting up.
Other Loans
Any traditional type of loan you can think of, such as payday loans, auto loans, or mortgage loans, can be made available through digital lending.
This gives investors the opportunity to fund a range of different loan options based on their interests and the kind of risk and returns they’re hoping to take on.
Machine Learning in Digital Lending
When understanding digital lending, we can’t overlook the importance of automation and machine learning.
Machine learning analyzes vast amounts of data to accurately assess credit risk. It can improve decision-making by looking into non-traditional factors, like transaction history. This leads to faster approvals, reduced defaults, and personalized loan offers.
Machine learning can also detect fraud and automate each stage of the lending process, making digital lending more efficient and reliable.
Conclusion
Digital lending is a far more efficient solution compared to traditional bank loans, which is why it’s such a rapidly growing sector.
The many new fintech solutions reshaping the financial industry don’t only bring new opportunities for investors, but they also open new doors for borrowers.Today, P2P lending is one of the most exciting ways for investors to diversify their portfolios and invest directly in startups. At Maclear, we are proud to offer the leading technology in digital P2P lending.