The Curious (and Interesting) Case of Small Consumer Loans
Small consumer loans have always been a thorn in the flesh of the lending industry. Why? Simply because they aren’t seen as profitable or worth the hassle for the lender as traditional loans. The constant growth and development of the Internet has empowered consumers, giving them more choice and power. Small personal loans have become a need rather than an afterthought.
As a result the market adapted, creating a niche, an entire vertical to service the growing demand for this product. In doing so, both the product and services surrounding this part of the industry have been refined, polished and evolved.
The small consumer loans market has matured to the point of garnering attention from the state. It is a sector that is authorised and regulated by the Financial Conduct Authority. Just have a look at their latest research findings.
The analysis records the current trends and exponential growth of the high-cost short-term credit lending market. It’s staggering to see that over 5.4 million loans were made in 2018 with no signs of slowing down.
Let’s get right into it and have a closer look at the interesting world of small consumer loans.
What is a Personal Loan?
A personal loan is most commonly identified as the borrowing of a set amount of money by an individual from a credit institution. These loans can either have a long term or short term form.
The recipient of the loan amount is usually responsible for paying back the debt of the principal amount in monthly repayments. Interest rates are typically attached to the original amount and that’s how the lender of the money incur their profit.
What to Do Before you Apply: A Questionnaire
Before taking a deep dive into the application process and specifics of small consumer loans, it would be wise to ask yourself a few questions to determine whether you actually need a loan in the first place. Here’s a short questionnaire to help you do that:
- How much do you need?
- What’s the reason for borrowing the money?
- What’s a reasonable timeframe for you to pay off the debt?
- What’s the status of your credit history?
Once you have the answers to these questions, your decision will be much easier and so will the application process. Have you jolted down your answers? Are we ready to go? Let’s do this.
How do Small Personal Loans Work?
The inner workings of the personal loan industry are quite simple to understand. A fixed total amount that usually caps at $5,000*, a fixed interest rate (loan rate) and a fixed repayment deadline.
*that differs according to the provider.
Whilst the theory of it all is plain and simple, its application comes with its own set of challenges.
Small personal loans are considered a high-risk investment on the part of the lender. That implies that qualifying for a loan has a lot of strings attached to it. These strings have different names such as credit history, credit score, personal circumstances and a thorough application process. The lender wants to have all the necessary information and guarantees about the consumer’s ability to repay the loan.
The online application process for a personal loan differs from provider to provider but it’s essentially the same. Sounds confusing? It’s not. When you apply for a personal loan online, providers are essentially looking to gather the same pool of information about you.
This information usually includes:
- ID or Passport
- Proof of income
- Financial documentation (other outstanding loans, credit card debt etc)
- Tax identification number
- Social security number
One of the ways that providers differentiate themselves from each other is the way/sequence of asking for this information. Some online application forms will be more detailed than others. Furthermore, different lenders offer different risk tolerance levels and varying rates. That explains why your application might be rejected by one provider but accepted by another.
In all honesty, the approval of your online application is usually based on bad credit vs good credit. Your credit history and credit score are the strongest clues of your ability to repay a loan on time. Traditional borrowing methods such as guarantor loans require another person to co-sign the credit agreement. The other person essentially agrees to repay the debt in the case where the borrower fails to meet the agreed repayments.
This is not an option with small consumer loans.
This is where things get interesting. Rates can be seen as the deciding factor when choosing your personal loan provider. Consumer loans are considered to be “unsecured”. That translates to higher rates than regular loans in order to cover the risk factor.
The rate will usually fluctuate based on factors such as credit score or savings history.
Returning customers or customers that have an established relationship with the lender usually enjoy lower rates and better repayment conditions.
Commercial Loans vs. Consumer Loans
The biggest difference between the two is the amount of the loan. Commercial loans deal with higher order amounts that service projects that operate on a bigger scale than personal loans. Commercial loans are most frequently used for business purposes. The purpose and higher value of commercial loans also has an impact on how they are regulated and policed by the government.
Credit Card Loans vs. Consumer Loans
It is very common to mistake these two loan avenues since they seemingly serve the same purpose. The reason behind the confusion is simple. Both avenues serve immediate needs, are related to fairly small amounts and have quick turnaround times.
What sets them apart might seem like small details but can actually have a big impact on your finances.
Credit card loans usually serve needs that are very urgent and can be repaid almost instantly. On the other hand, consumer loans have a slightly longer term impact and repayment deadline. This is also reflected in the rates as credit card loans usually have higher rates than consumer loans.
Moreover, credit card loans remove the element of choice. You can only apply for a loan with the provider you already have issued a credit card with. And don’t forget the temptation factor with credit cards.
The ease with which you can apply and get one makes it a dangerously viable option. Before you know it you can find yourself in some trouble. The longer application process for consumer loans is a healthy barrier to entry. It gives consumers a debt level they can handle.
When is it Wise to Apply for a Personal Loan?
Advice is always subjective and when it comes to how you choose to spend money, the situation does not get easier. Our suggestions are a draft of what we consider viable reasons to seek out a small consumer loan.
One of the reasons could be debt consolidation. Use the favourable rates of a personal loan to cover the expenses of an outstanding loan you already have.
Health, personal development projects and buying things like a car are also viable reasons to apply for a consumer loan.