The secured loans market is experiencing rapid growth
Alternative lending formats are their competition with microfinance institutions, offering more secure conditions for investors and more affordable terms for borrowers. One of the fastest growing segments of the loans secured.
Since the late 1990s, the microfinance industry has taken its firm place in the lending market, competing with banks. While banks are reluctant to issue consumer loans and loans to small businesses, requesting a large package of documents for prior approval, microfinance institutions do so with a guarantee close to 100%, and in just several hours. And after many industry players moved online, the process became as simple as possible for the borrower.
Such attractive conditions for many people who do not have access to Bank lending for various reasons have caused the explosive growth of the industry. And 2005 was even declared the International year of microcredit by the UN. The most developed market is considered to be in the USA, great Britain and China. For example, in the US, the share of microcredit is 0.3% of GDP, and in the UK there are over 2 million borrowers.
But for a couple of years, analysts have been talking about the overheating of some markets and the growing feeling of a bubble. The fact is that the very concept of such organizations, that is, the issuance of a loan without a thorough check of the borrower’s capabilities, involves a high percentage of bad loans. This situation has already started to disturb the governments of many countries. For example, the US is seeking to tighten the legal conditions for such organizations in order to protect citizens from being credit-tied and save poor people from the debt pit. In addition, the company Alphabet, which owns the Google search engine, expressed its concern about this. The company has stated that it will stop placing contextual advertising on Google AdWords for companies that issue loans for up to 60 days.
The overgrowth of the market and not the most positive attitude towards it made countries change the mood of investors. High profitability as the main advantage for them is inferior to rising risks, as a result of which investors seek to find less risky financial projects, but at the same time offering significantly higher profitability than in Bank deposits. In parallel, responding to market demands, technological financial projects are beginning to appear, which are also interesting for borrowers, because they are simple and convenient to use, while being less risky for investors.
In particular, one of the most growing segments is the market of secured loans. Since the loan is secured, the financial institution provides more attractive conditions for the borrower: the interest rate on average is 4–5 times lower than that of microfinance institutions. Accordingly, for the investor, such a project becomes more attractive in terms of the ratio of risks and profitability. The loan is issued for a short period with a minimum number of required documents, so the interest rate remains higher than that of banks. At the same time, the borrower lays down his property, which means that the probability that he will repay the debt increases significantly. And if not-the investor’s money is protected by collateral.
The format of granting a loan secured by valuable property appeared in the 15th century in France. Originally people mostly pawned jewelry, in addition loans secured by real estate where popular, along with cars and even household appliances. For a long time, the segment led a rather conservative existence, so in the early 21st century, a more progressive and initially based on Internet technologies microfinancial industry took away part of the market.
But in recent years, the pawnshop market is actively developing online. There are projects that are fully working in the online format, and the audience can be different. For example, the British Borro project specializes in loans for wealthy people. Mostly loans are issued that are secured by works of art or other expensive things. The Philippine project PawnHero, on the contrary, gives a small sum secured by goods like those sold on Alibaba.
One of the most accessible and actively developing segments are loans secured car titles. Receiving a loan secured by car titles means that the borrower can still continue to use his car while using the loan. This is convenient, and therefore in demand. This direction is now also actively moving towards the Internet, thanks to new technologies. For example, the Austrian platform SHIFT.cash automated all its processes, including the assessment of the collateral. The difference between the application and other similar projects is that it is aimed at the development of the international market. The investor of the loan can be a resident of any country, regardless of the country in which the borrower is located. And this solves the problem of disproportionate ratio of borrowers and investors within a state for the industry. In India, for example, there are more potential borrowers than the investment capital of microfinance institutions, and in Singapore, for example, the situation is the opposite. The platform is based on blockchain technology, and it allows you to make cross-border transfers quickly and safely.
Increased competition in a particular market always leads to the creation of an alternative, more attractive offer for the client. This is what is happening now in the area of loans, where innovative Internet technologies are the springboard for the growth of alternative lending formats.
