You pay your friends with Venmo. Why not use the same type of app when it comes time to take out a home equity loan?
Well, now you can. A rise in digital start-up lenders has made accessing home equity, in particular, almost as easy as digitally paying the babysitter. That’s good news, considering the boom in home values that has given millions of homeowners a spike in home equity — which you can put to use for home renovations or debt consolidation, for example.
But can you really trust these start-ups with a big, important money decision? And when does it make more sense to stick with an established legacy lender, instead? Here’s everything you need to know when deciding between the two.
How Is a Digital Start-Up Different Than a Traditional Home Equity Lender?
There’s no strict definition, but digital start-up lenders are purely online enterprises that allow you to apply, qualify for, and receive funding without ever stepping foot in a physical location — and sometimes, without even talking to a human.
Figure, for example, is a start-up that advertises a speedy digital loan process: applications that take mere minutes, and approval in as little as a week. Another start-up, Blend, promotes “a frictionless application experience” that takes place in the slick confines of its app.
On some level, these new lenders aren’t completely different than their more traditional peers. Even the oldest banking institutions have come to rely on algorithms behind the scenes, to some degree, when making decisions about whether to approve a loan.
“Whether you’re going to a brick-and-mortar bank or whether you’re getting it online, you’re probably going through some of the same processes,” said Mark Digiovanni, a certified financial planner and president of Marathon Financial Strategies.
Indeed, many established lenders have embraced online application processes that might mirror the start-ups. The difference is, with a digital lender, the online process is non-negotiable, and you might not want to upload all of your sensitive financial information to the cloud. “Those are legitimate concerns,” said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth.
With an established lender, you always have the option of working with a broker in-person and providing printed documents, instead. And with a digital lender, while there may be customer support options, it could be challenging to talk to a real person if you need help or special attention.
The other undeniable difference between these two types of lenders is speed. Cheng and Digiovanni say that algorithmic decision-making is almost always going to be faster than human-powered banking, especially if your financial situation is straightforward.
“It can be very helpful,” Cheng said.
Pros and Cons of a Digital Start-Up Lender
The main benefit that draws borrowers to a digital start-up lender is convenience. That comes in two main forms: speed and cost.
Many of these start-ups have streamlined the loan application process, and allow it to be done totally online. You can often connect your bank accounts directly to the application, feeding in your financial data automatically. It can be easier than hunting down documents, printing them out, and toting them to a bank branch.
Plus, because much of the process is computerized, these digital lenders can sometimes offer lower interest rates and fees. “Hiring humans is expensive,” Digiovanni points out. Digital lenders often have smaller staffs and lower overhead costs. “Their ability to be able to loan money at a better rate is going to be better,” he said.
That’s not universally true. “Don’t think just because it’s online it’s going to be cheaper,” Cheng said. A personal relationship at an established lender might get you a better rate. It all depends on your specific situation, so it’s good to shop around at multiple lenders before deciding.
Of course, there are some disadvantages to digital start-up lenders, too. If you have a complicated financial situation — say, you’re self-employed or are seeking an asset-based loan — you might not fit neatly into the typical borrower profile. And there isn’t likely to be a human team at the ready to customize the loan to your needs. In those cases, you might simply be denied by a digital lender.
“They do have their limitations,” Cheng said.
That gets to the other key drawback: The lack of personal relationships. Some borrowers like to know who will be handling their money, especially if they’re dealing with tens or hundreds of thousands of dollars. With a digital start-up lender, you probably won’t get that.
And finally, Cheng warns that borrowers need to be careful about the real cost of loans from online borrowers.
“Don’t just focus on the interest rate. You have to look at how much the overall loan is costing. Just because it’s online doesn’t mean you should have your guard let down,” Cheng said. Make sure you look for any hidden fees beneath the splashy rates advertised on the homepage.
Application and approval is faster
No need to travel to a physical location
Potentially lower rates
Less customization for unique borrowers
Lack of personal relationship
Potential for hidden fees
Digital vs. Traditional Home Equity Lenders: Expert Take on Which Is Better
Whether a digital or established lender is better ultimately comes down to your personal needs and preferences.
“Digital is good, but it’s not always better in every situation,” Cheng said.
If you have a simple financial situation — steady income, a home with plenty of equity to tap, a high credit score — and prefer to apply online, then you’re probably a good fit for digital lenders, Cheng says.
Even if it’s not the cheapest option, you might still want to go online to save yourself time — just like people shop online even when it’s not the cheapest way to buy a product. “People might value that convenience,” Cheng said.
If you decide to go the digital route, Cheng and Digiovanni both advise that you make sure that you’re working with a legitimate lender before you upload sensitive information.
“You want to check out a couple, two or three, and then if you’re not sure, look at some reviews, do your due diligence, and go to the Consumer Financial Protection Bureau (CFPB),” Cheng said.
The CFPB is a government agency responsible for enforcing consumer financial laws and logging consumer complaints. Consumers have access to the CFPB’s consumer complaint database when you can read complaints and legal actions taken against a financial institution.
At the end of the day, if you’re not sure about digital lenders, or you want special attention for a unique financial situation, there’s nothing wrong with falling back on a traditional lender.
“If you like to know who is the person behind your decision, then maybe you want to work with a local person,” Cheng said.
You might also be surprised: If you work with a bank that you already hold accounts with, they might waive certain fees or expedite the process based on your existing relationship.
Related: Best Online Mortgage Lenders