The emergence of digital loans in Australia - a fad or the new face of lending?
The benefits of digital loans
Convenience
Digital loans streamline the application process, allowing borrowers to complete it online at a time that suits them.
Speed
Borrowers can receive decisions within minutes
Cost
As an incentive, many digital lenders are currently waiving the traditional application fees, making homeownership more affordable
Self-management
Borrowers research, apply for, and manage their loans independently.
The risks of digital loans
Security
One of the primary risks associated with digital loans is the potential for hacking and data breaches. With sensitive financial information being transmitted online, there’s always a risk of unauthorised access (not to mention identity theft). As stated by Grant Thornton Australia, robust cybersecurity measures are critical for borrowers to protect their private financial information.
Limited Personal Interaction
Digital loans undeniably lack the personal touch of traditional lending, with borrowers missing out on the personalised advice and support that mortgage brokers provide. This can be particularly challenging for individuals who may not be well-versed in Australia’s day-to-day financial and lending landscape.
The complexity of, not to mention the constant changes in, the lending environment is why most borrowers need more guidance throughout the loan process. The lack of personalised advice – not to mention the absence of support – with digital loans will undeniably make it challenging. Take debt consolidation, for example – it sounds simple but can come with drawbacks.
A dependency on technology
The digital loan process is heavily reliant on technology. Not only does this make it inaccessible to some, but technical glitches or outages disrupting the application process can cause delays. Add to this those borrowers who aren’t tech-savvy and the challenge of simply navigating the online platforms and completing their applications without assistance is substantial.
Regulatory and compliance issues
The digital market’s rapid growth is at risk of outpacing regulatory frameworks, potentially leading to compliance issues. How do borrowers ensure their chosen lender adheres to relevant regulations? With digital lending, the borrower may (unknowingly) find themselves at risk (source: Grant Thornton Australia).
Less of a role for brokers, more complexity
While digital loans may lead to the role of a mortgage broker diminishing, borrowers will undeniably be left to navigate to a more complex loan market with fewer professionals to help borrowers navigate their options. Self-employed and struggling with the paperwork? There are alternatives – but how do you know what they are when you don’t know what you don’t know?
Professional insights from a broker’s perspective
Australia’s complex lending landscape
The lending landscape is complex.
Us brokers are required to have specific qualifications and undergo continuous education to maintain our profession – we’re required to complete at a minimum of at least 30 hours of CPD (Continuing Professional Development) every 12 months. This includes a mix of technical skills, regulatory knowledge, meeting with lenders and relationship managers, and ethical considerations to maintain our knowledge and qualifications.
With the tools provided to borrowers today, it’s certainly understandable as to why borrowers consider navigating the landscape themselves. But think about it – if it were so simple, why are we required to undergo CPD (Continuing Professional Development) every year?
The truth is, not using a mortgage broker is saying ‘no’ to the only free professional service we can think of! Securing a loan without professional knowledge can lead to suboptimal decisions and missed opportunities for better rates and terms. But it can also cost you more money because you’re:
- Choosing to DIY it rather than benefiting from a free professional service, and
- Denying yourself access to far cheaper rates than are available on the general market, digital or otherwise.
Information accuracy and the potential for fraud
Another concern we have with digital loans comes from the quality of information provided.
Digital loans rely on the accuracy of the information the borrower chooses to provide. Inaccuracies – no matter how small – can lead to significant long-term risks for banks. With the margin for error increased, there’s no doubt that lenders will need to factor in higher error rates (and therefore risk) when pricing loans.
On the flip side, we also have the intentional errors (and yes, they exist – we’ve seen it!). While digital loans are tailored for busy professionals, they’ll undeniably also become a lifeline for desperate borrowers, which increases the risk for both borrowers and lenders. Borrowers need to understand that providing false information constitutes fraud, which can have severe legal and financial repercussions. ‘Not if I don’t get caught’, you think – but it’s when unexpected unemployment or financial hardship occurs that you’ll be found out.
If only to remove your own personal risk, it’s beneficial to differentiate between DIY approaches and achieving the desired results through professional guidance.
Digital loans outpacing regulatory frameworks
Who’s to say that after a honeymoon period that some digital lenders won’t charge higher interest rates?
Comparing rates and terms from multiple lenders is crucial, but it’s also made more difficult by the growth of digital loans outpacing the frameworks designed to regulate them.
Again, this can lead to potential issues regarding compliance with lending standards and consumer protection laws. While we can advise borrowers to be cautious, you don’t know what you don’t know. How is a layperson expected to know and ensure that their chosen digital lender is reputable and adheres to the required Australian regulations?
Getting the best product for your specific needs
It’s a similar scenario with small print. Without professional guidance, borrowers may struggle to identify the best loan products for their needs. And even worse, those hidden clauses and short-term fixes can sometimes lead to increased debt rather than reduced overall financial burden – exactly what you don’t want.
Mortgage brokers are like retail verses wholesale…
Let’s be honest for a minute – would you pay retail price when you can shop at wholesale prices?
Not using a broker is paying retail prices. Whether it’s a new loan or you’re refinancing, we have access to direct rates that are often more competitive than those available to the public. At Educated Finance, with over 100 years of combined experience, we know how to secure the best rates. It’s making sure that clients benefit from personalised solutions tailored to specific needs that lets us deliver the very best outcome for clients.
Digital loans – balancing benefits and risks
It’s undeniable that the introduction of digital loans in Australia represents a significant advancement in the financial sector. What’s most critical, however, is that borrowers weigh the benefits against the risks. With no cost to borrowers (it’s the lender that pays our commission), our advice helps you to navigate the complex lending landscape effectively.
It’s only by understanding both the advantages and potential downsides that borrowers can make informed decisions about digital loans, weighing up the convenience and efficiency against safeguarding your financial well-being.
Considering applying for a home loan? Reach out to Educated Finance.
Call 1300 338 228 and take up opportunities today with the team that’s also with you for tomorrow.
