You pay your friends with Venmo. Why not use the same type of application when it comes time to take out a mortgage?
Well, now you can. A rise in the number of digital startup lenders has made accessing home equity, in particular, almost as easy as paying the babysitter digitally. That’s good news, given the boom in home values that has given millions of homeowners a boost to their home’s equity – which you can use for home improvements or debt consolidation, for example.
But can you really trust these start-ups for a big and important financial decision? And when does it make more sense to stick with an established legacy lender instead? Here’s everything you need to know to choose between the two.
How is a digital startup different from a traditional home equity lender?
There’s no hard definition, but digital startup lenders are purely online businesses that allow you to apply, qualify, and receive funding without ever setting foot in a physical location — and sometimes , without even talking to a human.
Figure, for example, is a startup that advertises a fast digital lending process: applications that take just minutes and approval in as little as a week. Another startup, Blend, promotes “a frictionless app experience” that takes place within the sleek confines of its app.
On one level, these new lenders are not completely different from their more traditional peers. Even the oldest banking institutions have come to rely on behind-the-scenes algorithms to some extent to make decisions about whether or not to approve a loan.
“Whether you go to a physical bank or get it online, you probably go through some of the same processes,” said Mark Digiovanni, Certified Financial Planner and President of Marathon Financial Strategies. .
Indeed, many established lenders have adopted online application processes that could mirror start-ups. The difference is that with a digital lender, the online process is non-negotiable and you may not want to upload all of your sensitive financial information to the cloud. “These are legitimate concerns,” said Marguerita Cheng, Certified Financial Planner and CEO of Blue Ocean Global Wealth.
With an established lender, you always have the option of working with a broker in person and providing printed materials instead. And with a digital lender, while there may be customer support options, it can be difficult to speak to a real person if you need help or special attention.
The other undeniable difference between these two types of lenders is speed. Cheng and Digiovanni say that algorithmic decision-making will almost always be faster than human-powered banking, especially if your financial situation is simple.
“It can be very helpful,” Cheng said.
Pros and Cons of a Digital Startup Lender
The main benefit that draws borrowers to a digital startup lender is convenience. This comes in two main forms: speed and cost.
Many of these start-ups have simplified the loan application process and allow it to be done entirely online. You can often connect your bank accounts directly to the app, automatically populating your financial data. This may be easier than searching for documents, printing them out and taking them to a bank branch.
Also, since much of the process is computerized, these digital lenders can sometimes offer lower interest rates and fees. “Hiring humans is expensive,” Digiovanni points out. Digital lenders often have smaller staff and lower overhead. “Their ability to be able to lend money at a better rate is going to be better,” he said.
This is not universally true. “Don’t think it will be cheaper just because it’s online,” Cheng said. A personal relationship with an established lender could get you a better rate. It all depends on your specific situation, so it’s good to shop around with several lenders before deciding.
Of course, digital startup lenders also have some drawbacks. If you have a complicated financial situation, for example if you are self-employed or looking for an asset-based loan, you may not fit the typical borrower profile perfectly. And there is unlikely to be a human team ready to customize the loan to your needs. In these cases, you might just be turned down by a digital lender.
“They have their limits,” Cheng said.
This brings us to the other major drawback: the lack of personal relationships. Some borrowers like to know who will look after their money, especially if it’s tens or hundreds of thousands of dollars. With a digital startup lender, you probably won’t get that.
And finally, Cheng warns that borrowers need to be careful of the real cost of loans from online borrowers.
“Don’t just focus on the interest rate. You need to look at how much the overall loan costs. Just because he’s online doesn’t mean you have to let your guard down,” Cheng said. Be sure to look for hidden fees under the splash rates advertised on the homepage.
Less customization for single borrowers
Lack of personal relationship
Potential for hidden fees
Digital vs Traditional Home Equity Lenders: Expert Opinion on Which is Better
Whether a digital or established lender is preferable ultimately depends on your personal needs and preferences.
“Digital is good, but it’s not always better in every situation,” Cheng said.
If you have a simple financial situation — a steady income, a home with lots of equity to leverage, a high credit score — and prefer to apply online, then you’re probably a good fit for digital lenders, Cheng says. .
Even if it’s not the cheapest option, you might still want to go online to save time, just like people shop online even if it’s not the cheapest way to buy a product. “People might appreciate this convenience,” Cheng said.
If you decide to go the digital route, both Cheng and Digiovanni advise you to make sure you’re working with a legitimate lender before uploading sensitive information.
“You want to check a few, two or three, then if you’re not sure, check out some reviews, do your due diligence and go to the Consumer Financial Protection Bureau (CFPB),” Cheng said. .
The CFPB is a government agency responsible for enforcing consumer financial laws and registering consumer complaints. Consumers have access to the CFPB Consumer Complaint Database where you can view complaints and legal actions taken against a financial institution.
Ultimately, if you’re unsure about digital lenders or want special consideration for a unique financial situation, there’s nothing wrong with falling back on a traditional lender.
“If you like knowing who the person behind your decision is, then you might want to work with a local person,” Cheng said.
You might also be surprised: if you’re working with a bank you already have accounts with, they may waive some fees or speed up the process depending on your existing relationship.
Related: Best Online Mortgage Lenders