Our world of modern technology has made it easier for people to get loans.
Instead of applying to a bank in person, someone can apply to dozens of lending institutions in a matter of minutes to hours, and there are more opportunities than ever before. Major banks and private lenders aren’t the only options anymore; peer-to-peer lending and other loan-centric startups have become incredibly popular.
On one hand, this development could have a positive impact on society:
- Home loans and mortgages. Available credit makes it easier for people to buy homes and for the most part, home ownership is good for the economy. It gives people an opportunity to accumulate wealth, and a reason to focus on paying off their debts. Of course, if those homeowners are irresponsible, and default on their mortgages, this could quickly turn into a disadvantage.
- Startup capital. Widely available capital is also good for entrepreneurs, since it makes it easier to secure the capital necessary to build a business from the ground up. Startup and entrepreneurial activity are good for the economy as well, supporting long-term GDP growth, and in the wake of new technological breakthroughs, higher quality of life.
- Economic activity. Making loans and credit available to more consumers also facilitates overall economic activity, enabling consumers to spend more and buy things they ordinarily might not consider. For the most part, economic activity benefits everyone, with more job opportunities and opportunities to build wealth.
But is there a downside to such rampant availability?
First, we need to consider the current level of consumer debt, and how that debt could negatively affect the rest of society. The average credit card debt for U.S. households is $6,929 (among households with debt), and that’s only one type of debt. That’s not including student loans, which amount to an average of nearly $40,000 for the typical bachelor’s degree graduate, or home mortgages, which add a significant amount of debt.
If a consumer holds too much debt, they’ll be less likely to be economically active. They’ll be less likely to take economic risks. And worst of all, they’ll be more likely to default on their loans, which could have a drastically negative effect on the economy.
The United States housing bubble of 2008, where millions of homeowners foreclosed on their loans, resulted in a worldwide economic recession, and it formed at least partially because credit was too available; banks were extending loans to people with a poor credit history and passing those loans off as low-risk. If loans and credit are extended online, it could result in a similar, albeit smaller kind of bubble.
Good Loans and Bad Loans
We also have to consider that not all loans offered are "good" loans, offered with the intention of being a mutually beneficial economic transaction between two entities. A savvy consumer will ask critical questions of their loan source before they sign any paperwork, and will recognize the difference between a good loan and a bad loan, but not all consumers are able to make that distinction.
For example, some loans online are predatory and offer ridiculously high interest rates.
Others specifically target people with low credit scores or those who are uneducated on financial topics, attempting to exploit them for as much money as possible. As the number of available loans increases, the number of both good loans and bad loans will increase.
The Bottom Line
There are more loans and more types of credit available thanks to the availability of the internet, but that isn’t wholly a good or bad thing. It’s giving more people more available economic opportunities, but at the same time may be opening the door to a worsening consumer debt crisis, and more opportunities for predatory lenders to exploit people who don’t know any better.
As a consumer, there isn’t much you can do other than to educate yourself. If you need a loan, make sure you do your research on your lender, and before you close the deal, make sure you understand your current level of debt — and the role debt can play in your overall financial health.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant.Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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