Loans and lending have been around for thousands of years and in many different forms. Credit and loans seem to have a distasteful air about them. But if we would know the truth, the development of human civilization would not have happened without there being credit!
A Short History of Lending
Online loans have a short history, but one thing is for sure: The Era of One-Click Loans is Here! The roots of traditional borrowing can be traced back over 3,000 years. Loan contracts from Mesopotamia show a credit system that included interest. Another good example is that the exploration of the New World by Spain was supported by loans, as was the colonization of America. Loans helped the world progress through the Industrial Revolution. Society needs lending, as it has been responsible for some of the most significant projects in modern history.
The Road to Online Lending
Online lending these days is where it’s all happening and it’s going to get bigger. For a better understanding of where we might be heading with online lending, perhaps we should look at its roots before online platforms came into being.
The Beginning of Lending
Lending between families and friends, which still exists today, was the earliest form of informal loans. Family lending circles worked by each in the group making the same monthly payment. The loan rotated every month to a different person. Each month a different borrower received the loan until everyone in the lending circle had been given a chance.
Ancient Rome and Payday Loans
The Romans have been blamed for starting most things unless the Egyptians got in first. Starting formal lending was also their credit. Banking was the business run by private individuals acting as pawnbrokers in Roman times. By lending farmers large sums of money to plant crops, they firstly introduced of a sort of ‘payday loan’ was created. The loan would be repaid by the farmers when they harvested their crops. Then they would request a new loan for the following season’s planting.
Lenders made these loans secured by holding items as collateral to mitigate risk. There might be different interest rates and terms these days compared to Roman times, but the loan structure is the same.
Religious leaders held sway during Middle Ages. Around 325AD they stated that interest rates above 1% were tantamount to robbery. During that period, Christians were not allowed to lend money while Jews could give loans with interest, but only to non-Jews. It’s interesting to note that the lenders in those days carried on their business from benches called “bancas.” That’s where our word for “bank” originated. A retired lender would smash his workbench, called “banca rupta” and guess what word came from that? Bankrupt.
By the 18th century, lenders continued to use collateral, but loans changed mainly to indentured loans. It meant that the rich lent to the poor and they worked off their debt in return.
A new style of lending appeared in the early 1800’s. It was fairer and more available to the average and lower income earner in America. The Philadelphia Savings Funds Society opened in 1816. It provided a place for Americans to save as well as apply for loans.
There was a significant shift in lending during this period as lenders used different ways to identify responsible borrowers. The principal lending model used financial data rather than collateral or family ties.
The Introduction of Online Lending
Improvements and advances in technology and electronic data led to changes in the way lending was managed. A mortgage lender in Detroit, Quicken Loans, sped up the whole lending process in the mid 1980’s. Their application and review process were all conducted online.
But computers weren’t all that slick back then. It wasn’t until 1999 that the First Internet Bank started online-only banking for mortgages and some other banking services. This system enabled borrowers to apply for loans without leaving their house or even meeting with the bank.
The popularity of online loans resided in the fact that it eliminated the headaches associated with traditional loans and made the whole process very fast. And this was mainly good for business loans.
Private lenders were able to offer loans to people and businesses who might have been turned down by banks due to credit scores, or not having been in business long enough. This change was the start of big things for online lending.
Alternative Online Lending
Once the lending process was online, then lenders and data programmers started to work out even quicker and better ways to enable borrowers to apply for loans. Prosper, a company launched in 2006, pioneered this style of alternative lending. Other companies were quick to follow suit.
Advantages of Online Lending
- Faster than traditional institutions like banks.
- The credit score is not necessarily a make or break for a borrower.
- You can make the loan application in the privacy of your home.
- Banks took too long, required far too much paperwork, and the whole process seemed complicated.
- If an individual wanted a short-term loan for a small amount of money, banks just could not provide that service.
- Emergencies and the need for fast money occur every day. With a one hour approval time and a one day wait for funds, online lending fills that requirement.
The fact that one can obtain money so easily has its downsides too.
- People lose sight of the value of money.
- Falling into a loan/debt cycle is easy.
- The temptation is to borrow more than you need.
- High interest rates.
The future of online lending is hard to predict, but one thing is for sure – online lending is here to stay.
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10. Alan Kline (2018). Why Point-of-Sale Lending is Hot Right Now. Americanbanker.Com. Available at https://www.americanbanker.com/news/why-point-of-sale-lending-is-hot-right-now