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What's the di�erence between �ntech companies andtraditional lenders?

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Bridget CassidyApr 4, 2018 Like

Thinking about refinancing your student loans? I know, I know. It hurts just

thinking about it. It’s kind of like having to go to the dentist, right?

Ugh. As painful as it might be, refinancing or consolidating your federal or private student

loans with a private lender can be one of the best financial decisions you make in your

lifetime. And it is a great time to refinance or consolidate your loans due to the recent

changes in the student lending marketplace.

So, What’s Changed?

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The shift in private student lending services is primarily attributed to two recent events: the

2008 financial crisis and the explosion in U.S. student debt post-crisis. Since 2009, the

total student loan debt has gone up more than 70%, with more than $1.5

trillion in student debt, surpassing the nation’s total credit card debt.

So, what are other contributors? After the financial crisis, traditional banking institutions

were burdened with meeting new banking regulations and therefore tightened their lending

practices, becoming even more risk-averse, specifically in regard to student loan lending.

Startup tech companies looked at these conditions and jumped at the opportunity to fill in

the lending gap.

Some of these startups are called Fintech companies and offer student loan refinancing

services that are quite different from traditional banks.

So, what exactly is a Fintech company?

You may have heard the term before, but Fintech is the combination of financial and

technology and describes companies that offer mobile payments, money

transfers, asset management, and online lending.

Fintech has been around for years but, until recently, it only represented back-end

processes in the financial services industry. Now Fintech has moved to the front end and

new Fintech companies are competing with traditional banks for your student loan

refinance business.

These companies, often funded by venture capitalists, are disrupting the financial

marketplace by applying new technology to online services and introducing a simplified

student loan refinancing application and approval process while also focusing on overall

customer experience and financial literacy.

What Does This Mean for You?

Fintech is competing for your business, big time. You are the tech-savvy generation, having

grown up with mobile phones in your hands. There are more millennials than baby

boomers and, unfortunately, you guys have more student debt than any other age group in

the United States: 63% of your generation has more than $10,000 in student debt. Now,

that hurts.

Ok, back to the dentist. According to the Millennial Disruption Index (2015), 71% of your

generation said they would “rather go to the dentist than listen to what a bank has to say.”

And 69% distrust the financial services industry, in general, according to the Makovsky

Wall Street Reputation Study (2016). So, a Fintech student loan refinancing company

might be the right fit for you, but let’s do a comparison based on our reviews, which include

reviews on both traditional banks and Fintech lenders.

Please note that this is a comparison of private lenders only and does not address the

consolidation of federal student loans with a federal loan servicer.

To find out more information on the federal student loan consolidation program, go to

Direct Consolidation Loan.

LOAN SPECIFICS

Most likely you are looking at two key factors in refinancing your student loans: the best

interest rate to save you money and the right term to get you the monthly payment you can

afford. Both types of lenders offer fixed and variable interest rates, multiple loan terms,

waive fees and prepayment penalties and offer flexible maximum loan amounts.

Both offer the refinancing of private and federal student loans (some also offer loan

consolidation). Fintech companies, however, can offer lower interest rates because this type

of lender only provides online services, and doesn’t have a large overhead to cover.

QUALIFICATIONS

Fintech companies focus on simplifying the overall application process experience as well

as reducing the approval process time. Many Fintech companies use proprietary algorithms

that include a broader set of eligibility criteria including both traditional and non-

traditional application information.

Traditional banks, on the other hand, are slower to implement new technology but are

working to catch up, though you may still face a more cumbersome loan process with a

bank than with a Fintech company. However, Fintechs have been called out on “cherry-

picking” borrowers, preferring applicants who have higher credit scores, advanced degrees,

and a higher earning potential.

CUSTOMER EXPERIENCE

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Fintech companies focus on financial literacy and customer service with some companies

employing former students to work with borrowers. These individuals have student loan

debt and know the pain associated with the loan process. Traditional banks may not have

the same level of personal online customer service but can provide in-person support at

branches located in your neighborhood. Additionally, many banks offer discounts,

including a reduction in your interest rate (some as much as 0.50%) if you also open a

checking account with the bank.

REPUTATION

Fintech companies are fairly new on the lending scene, but some already have high ratings

with the Better Business Bureau and are receiving good reviews on consumer review sites.

Traditional banks are more established, lending to a longer reputation history. You can see

our reputation reviews by going to our 10 Best Student Loan Refinance of 2018 to learn

more.

COLLABORATION AND TECHFIN

The student loan refinancing marketplace is still changing with larger banking institutions

embracing new financial technology and even partnering with Fintech companies.

Additionally, Techfin companies (yes, you heard that right) like Google and Amazon could

become significant players in online banking services.

Millennials trust these companies over banks and may prefer working with Fintechs to

refinance their student loans. Either way, let’s hope the trend continues to be customer-

centric and focused on what you want out of your student loan refinancing experience: no

more eye-rolling or dentist references, only lower stress levels thanks to easier application

processing, great interest rate offers, and the best loan terms to meet your needs.

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