The True Cost of Online Loans

by Jerry Ernst


It’s a common situation. A business owner needed a loan to grow his business, and, since banks require a substantial amount of paperwork the borrower didn’t have time to produce, he went with an online quick loan provider.

The loan application took only about 20 minutes, with minimal fuss and paperwork. The borrower wasn’t a fan of the automatic payments, but it reduced the interest rate and the lender even approved the borrower for a bigger loan than was initially requested. He signed the contract and spent the funds.

Trouble hit like an oncoming haboob.

Payments were pulled from the borrower’s bank account once a week, not once a month, and the lender had full access to the borrower’s bank account. The borrower couldn’t stop payments without changing checking accounts and violating the contract he hadn’t read closely enough, and the lender wasn’t willing to change the terms — even though they weren’t the same terms the borrower had thought he was getting.

It comes as a nasty surprise to many that online lenders aren’t held to the same laws, regulations and compliance oversight that banks follow.

Online lenders aren’t banks, so Truth in Lending disclosure laws designed to protect borrowers don’t apply. They have zero government regulation and compliance oversight to keep their interest rates and fees reasonable. Plus, if a borrower doesn’t read the contract closely enough or notice when it omits critical details, only to find out later that its terms don’t match his expectations, there’s little recourse available.

Regulation is coming but, until that happens, abuse is high. Online loans might be the path of least resistance, but that convenience has a cost.

Additionally, since most online loan approvals are software-based decisions with no analytics of the business’s viability and no customer relationship, the borrower pays higher rates to cover the lender’s high volume of losses — sometimes as high as 100 percent, hidden within the contract fine print.

Trust is dangerous in an online world where customers are just a faceless transaction. There’s comfort and protection knowing banks follow specific rules, and are held closely to standards with pathways to rectify problems.

Is a faster loan process worth giving that up?

Local banks might require more resources and a bit more time, but the value gained is worth every minute spent. Proper underwriting is a chance for a banker to get to know the borrower, delivering something called “right finance.” Only a banker can help someone understand if a loan is enough to help that business owner succeed or something that will push the business into bankruptcy, and match capital to the business owner’s goal in a way that makes the most sense. Good bankers consider total resources, not just the dollar amount being funded.

Even if someone isn’t ready to seek a loan quite yet, creating a trustworthy banking relationship gives a borrower that much-needed financial coach in his or her corner, poised to help whenever needed.

Jerry Ernst is president of Horizon Community Bank, a locally owned and operated bank recently ranked as an Arizona Top 10 Lender by the U.S. Small Business Administration.

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