Reasons why direct lender loans are booming
Alternative lenders and fintechs have been threatening banks since the economic crisis from 2007 – 2009. Reports show that 2019 biggest lenders were direct lenders for both consumer credit and business loans.
What is a direct lender?
Direct lender loans are not really all that different from a bank or any other kind of credit. It is a straight forward agreement, and typically unsecured. What’s the key difference that makes them so popular then? They are so flexible and an incredibly quick way to get access to the money consumers need in times of financial hardship.
You don’t need to take our word for how popular direct from lenders are, research shows that one in 10 American adults are intending to take out a personal loan over the coming year. This highlights just how many people are planning to use them and factoring them into their budget for the coming year; it is safe to assume that even more people will actually take a loan out. As expenses crop up, a personal loan is a dynamic and useful way to deal with unexpected costs. Direct personal loans can be paid into a recipients account in the same day they apply, meaning that they are a popular option for emergency finance, too.
Using a direct lender for your business
Using a direct lender rather than setting up a line of credit with a traditional bank is now the most popular method of sourcing business finance for small to medium enterprises. These are so popular because they are so flexible, just like a personal loan from a direct lender.
Direct lenders allow you to maintain control of your business, and do not look for a percentage of your revenue or an ongoing agreement, unlike other creditors. Investors gain dividends and returns on a loan through interest rates and small fees. They are a safe means of borrowing.
In turn, recently, big hitters in business have been turning to direct lenders to help with their finances. New Media Investment Group went direct to a lender to acquire a new arm of their company. The loan agreement was made swiftly which means the investment group, and all businesses who choose to borrow this way, are able to stay dynamic and strike quickly, ensuring they do not incur any lost opportunity costs. Individual investors also agree that direct lending presents the best opportunities.
It is important to note that a personal loan cannot be used for a business or investment. Currently, North America possesses the biggest share in the global direct lending market.
How are direct lender loans changing the finance industry?
Direct lenders are enjoying an understandable flux in credit due to investor attention. The shift towards this kind of lending has been a gradual process since the economic crisis in the later 2000s. Consumers and businesses lost trust in traditional banking at the same time that banks knuckled down and became very tight-fisted with their cash. As a result, businesses, including everyone from multinational conglomerates to your neighbourhood convenience store chain, were forced to seek credit from alternative providers. In steps direct lenders.
Their reputation continued to flourish and the up turn in direct lending began. Since then, investors have been flooding the market looking for lucrative but reliable returns. Direct lenders are a safe way to invest with steady, low yield landscape.
The impressive investor demand within the market also means that they are more willing to lend to riskier borrows, in comparison to the traditional, cautious banks. However, this boom has been ongoing for some time now and experts within the industry highlight that the economic cycle for this market is reaching its crest. This could be concerning, particularly if many business’ finances are caught up with a small circle of lenders.
Consultants, economists and those working for the direct lenders themselves, as well as traditional banks and regulators are all working to avoid the chaos that could ensue in the event of an economic downturn or a recession. To help stabilise the lending market, it’s expected that many traditional banks, that do still have a large share of the market and of capital, are going to collaborate or partner with fintechs and direct lenders. This will help future-proof traditional lenders with the integration of innovative companies and ensure lenders and ensuing borrowers can cope in a downturn.
