In our financial situation these days, it is getting harder and harder to get approved for anything in banks or what we will refer to here as “traditional” lending institutions. Students, small businesses and other people looking to get cash for a little less effort than what banks offer them have looked for Institutions other than brick and mortar banks for their loans. Adam Jiwan, a co-founder of Ridge Road Partners, LLC., is a firm believer in alternative solutions for loan needs, especially for students.
With these mostly online alternative banking and loan solutions, most “unbanked” or people who do not use traditional banks can now have access to lending. There are many people that do not prefer banking institutions for many reasons, some want privacy, others simply want to live off the grid or some may be too young and have not yet started building any credit history. They go along with their financial affairs by using check cashing centers, payday lenders, and fee-based prepaid debit cards. This demographic described banks as elitist, confusing, and less service oriented than alternatives. Yet many more have simply gone tired of the ever-increasing opportunistic fees that banks charge.
Banks more expensive than Payday Loans
It is a mystery why payday loans get all the bad rep. The average overdraft fee is relatively high vs 5 years ago. An overdraft is caused when you withdraw more money than the account holds. If you consider the amount of the overdraft as a short-term loan and the fee is the interest it would actually amount to an APR ( Annual Percentage Rate) of 5000 Percent. This figure DWARFS a 14-day payday loan which charges anywhere from 200 Percent to 500 Percent APR. However, because it is larger and arguably a more “respectable” institution, it barely gets any criticism. Mainstream banking costs are now so high that they no longer offer any free savings accounts.
Competition is Better for Consumers
As these alternative lending institutions proliferate, banks are beginning to do a double take, resulting in at the very least a reduction in rates. This applies to banks and other alternative lending institutions both. Because of competition, these institutions are starting to innovate and offer lower-priced products.
This should indicate to lawmakers and our government that alternative solutions are needed aside from long-standing traditional banks and financial institutions. They should focus more on regulations that will allow both clients and alternative lending institutions to prosper instead of outlawing them.