The COVID-19 crisis has made a massive impact on our daily lives. As we are forced to isolate for safety purposes, many businesses were crippled due to reduced manpower. Many industries suffered, including the online lending sector.
How Online Lending Works
Borrowers tend to go to online lenders for quick and easy loan approval. Most of the time, online lenders can instantly decide on your loan application, the amount you can borrow, and the terms of your payments. This is entirely different from how traditional banks review your loan application, which usually takes a lot of time.
Online lenders offer a convenient way to get a loan, especially when you need immediate funding. It is the same as getting a loan anywhere else but faster. Moreover, online lenders offer many types of loans, including quick personal loans.
Most loans offered by online lenders are unsecured. This means that collateral is not required to get approved. Hence, you can save yourself from risking your assets. If you fail to pay back your loan, your credit score will gain a negative impact, but no assets of yours will get repossessed or face foreclosure, unlike getting a secured loan.
COVID-19’s Impact on Online Lending
The coronavirus pandemic has caused financial difficulties. Many businesses were forced to close (some permanently), and many people lost their jobs. Online lending borrowers who were greatly affected financially have no choice but to pause their loan payments for a while to give way for their daily necessities in order to survive.
Many online lenders choose to stay quiet about the challenges they are currently facing. However, corporate disclosures from OnDeck Capital and LendingClub showed that the online lending industry had suffered damages starting mid-March. Since online lenders are independent of the banking industry, they can’t turn to deposits as a source of loan funding. That is why they have relied on other sources of liquidity, such as hedge funds, securitization markets, and other private investors.
Securitization markets have been one of the significant sources of loan funding for most online lenders. However, the pandemic has made it challenging to access. Because of that, online lenders are asking the Federal Reserve Board to incorporate investment-grade unsecured personal loans in the Term Asset-Backed Securities Loan Facility.
On the bright side, the Coronavirus Aid, Relief, and Economic Security Act have helped many borrowers to make loan payments. According to dv01, a data and analytics provider concerning the online lending industry, online loans in delinquency or forbearance have been smaller than the rising unemployment rate.
Consumer Borrowing Habits Due to Coronavirus
During these difficult times, some consumers tend not to get a loan because they might not make proper payments in the long run. However, for those who are in dire need, getting a loan is the right option. Furthermore, consumer borrowing habits are expected to change during this pandemic.
Americans will not stop borrowing. In fact, the US economy has been built on consumer spending. But, as we all face the new normal, consumers’ views about borrowing will now depend on many factors. This includes their employment status, the place they live in, the choices available to them now, the necessity to borrow, and sometimes even their age.
Since consumers are now staying at home to keep safe, they tend to spend less. This also means that consumers will borrow less and save more money. Because of that, lenders face a challenge on how they can keep up with the types of credit they offer.
Lenders’ Initiative During COVID-19 Crisis
Lenders are now hesitant to let new people borrow from them because of the rising unemployment and possible recession thanks to COVID-19. That is why many lenders raised their qualifications in getting a loan to make sure they get paid back. This includes income verification and requiring a good credit score. Additionally, some lenders only approve a loan for borrowers who work in an industry considered safe from coronavirus.
Both banks and online lenders are doing their best to address the coronavirus pandemic’s economic havoc. Most of them have already informed their customers about precautionary measures to keep their staff safe. Moreover, they also communicated with their customers concerning loan payments. Some already offered safe new payment systems and flexible payment schedules for those caught in a bad financial situation.
In general, consumer lending has faced significant hardships in the course of the COVID-19 crisis. According to business insiders, the pandemic has triggered credit card spendings to tank 40% and retain loans to grow. Furthermore, it is believed that these difficulties will continue to emerge during these difficult times.
Takeaway
Recent changes in consumers’ views about credit and the possible adjustments in their borrowing habits are often because of the coronavirus pandemic. Hence, lenders, especially online lenders who are greatly affected, should adapt to this change. It will help if they think of ways to cater to the consumers’ demand to keep their industry alive and safe during this crisis.
