There is an old adage that many borrowers use to humorously explain traditional lending advice: Bankers will lend you an umbrella but will take it back as soon as it begins to rain. This long-running joke has some serious underlying truth. One place this practice is plain to observe was the mortgage lending crisis that took place a few years ago. Lenders aggressively provided loans while the housing market surged, however; when the market dipped, banks began to punish borrowers creating a spike in foreclosures.
This practive makes perfect sense from the point of view of the banker or lender. Lenders seek to preserve their investment and protect themselves from losing money. Therefore, punitive lending practices seem to be somewhat predictable. In contrast, this practive can leave many borrowers frustrated.
Towards More Transparent Lending
Traditional banks and newer lending companies will have more access to more information about companies and their performance. Likewise, borrowers will also have access to more information about their lender and their loan.
Companies such as Credit Junction and Kabbage are beginning to utilize a model that provides a detailed, real-time flow of information from the borrower to the lender. Rather than exclusively collecting a FICO score and other data at the time the loan is issued, these companies continue to gather information and update a borrower’s profile.
The increased free flow of information between lender and borrower should result in better credit terms, lending to borrowers currently shut out of traditional lending process and a better understanding of the circumstances faced by a borrowing business.
In addition, lenders will also benefit. Simply, more information means less uncertainty and better loan practices. For instance, lenders will be more able to accurately predict the risk of loans leading to better lending rates that can be properly adjusted based on real-time data.
You can learn more about this topic by checking out this article from Forbes.