Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 26, 2012

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Personal loans are the lifeblood of large purchases in our economy. They can be used for virtually anything: large domestic products, debt consolidation, medical costs, business startups, and subsidies for other loans are only but a few of their uses. While this type of financing is usually reserved for those with decent credit scores, personal loans provide a necessary service to those wishing to finance cheaper money for longer than what average credit cards will allow.

But given the state of the economy, our largest personal loan lenders are retracting back into themselves, hoarding their money as if they were fictitious deranged hobbits, worried about losing that which is most precious to them.

The nation’s four largest banks—JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo—have all demonstrated a decreased willingness to lend out personal loans. According to a report by Bloomberg, the total number of loans fell 4.9 percent in this year’s first quarter when compared to 2010’s first quarter.

“They’re deliberately shrinking their size,” explained David Trone, an analyst at JMP Securities LLC in New York, to Bloomberg. “But that has earnings implications.”

While their profits may decline as a result of this intentional move to restrict personal loan lending, the banks presumably feel the market’s simply too risky to actively lend money out.

One Man’s Hesitation Gives Another Man Opportunity

But the beautiful part of capitalism is demand will always be met.

Small lenders have caught the scent of blood in the water, and leapt on the opportunity presented by their fleeting bigger brothers. According to the same Bloomberg report, personal loan lending from regional banks and smaller lenders increased by 9.8 percent during this year’s first quarter.

For some experts, that’s wonderful news.

“It’s the health of the banking system and the banks’ ability and willingness to extend credit that’s at the heart of any recovery,” said David Jones, a former economist at the Fed in New York. “If anything helps in getting this recovery going, it’ll be those regional banks.”

It’s Better Anyways

Rohit Arora, the CEO of Biz2Credit, told Fox News that his company conducted a survey of bank relationships and found that three of the four largest banks—JP Morgan Chase, Bank of America, and Wells Fargo—were amongst the lenders that most frequently rejected applications from their own small business clients.

Apparently, rewarding clients for loyalty is too old fashioned in the eyes of the too-big-to-fails.

And that’s exactly why this trend of the small replacing the big may be better for the consumer anyways. Small regional banks, non-bank lenders, micro lenders, and credit unions all have the capability of providing better service, says Arora.

Arora believes there are four areas that these smaller lending services excel in:

  1. Since these personal loan servicers are small and localized, they’re more in tune with what local businesses need. Their lending guidelines aren’t dictated by a universal formula, but instead they have the luxury of estimating the risk of personal financing by looking at trends specific to their local communities.
  2. Smaller lenders can issue personal loans based to those with poorer credit scores since they aren’t forced to adhere to a rigid lending formula. Consequently, these lenders are more apt to be understanding of credit dings than their bigger cousins are.
  3. The decision-making process is much more streamlined and efficient. Short and easy online application forms often allow borrowers to get approved for personal loans quicker than they could with big lenders.
  4. Small lenders can often offer better interest rates. Many smaller lenders pool money from local investors, and thus have the freedom to offer lower rates with their investors’ permission.

It’s largely due to these reasons that Arora’s survey revealed that small banks approve nearly 50 percent of small business funding requests.

So don’t worry over whether or not the bigger banks will continue to deny their loyal customers’ loan applications. In fact, let’s hope they do. The advent of smaller lending services is upon us, and that may be better not only for the individual, but for the economy as a whole.