So you need a loan. You might need the money to consolidate debts, buy a boat or an RV, pay for a wedding or pay taxes. You could go to your bank but, well, you just hate the idea of facing that personal banker and groveling for money. The problem with getting a loan from a bank or even a credit union is that you need to have pretty good credit. If you don’t, you might be facing the embarrassment of being turned down. And who wants to be turned down by that young snip of a personal banker who stares at you as if you were a dead fish.
If you have less than stellar credit or just don’t want to have to go to a bank for a loan there’s a new way to get one called marketplace lending. Until a few months ago it was called peer-to-peer lending but then some of the big guys of finance like hedge funds got involved so if you are able to get one of these loans it probably won’t come from one of your peers.
Why a marketplace loan can be better
The prime reason why a marketplace loan can be better is because it’s likely to cost you less than if you were to go to a bank or even a credit union. There are currently marketplace lenders offering loans for as little as 4% interest. And these are fixed and not variable-rate loans. Their terms are generally three or five years depending on the amount you want to borrow and your credit worthiness.
A second reason why a market place loan can be better is that you may be able to get one even if you have poor credit. Bankers hate risk. If you have poor credit that’s a red flag – that you represent a risk. In comparison, marketplace lenders are often willing to take more of a risk on you. Of course, your loan will come with a higher interest rate – to offset that risk. Finally, marketplace loans are unsecured so that if you are able to get one you won’t be required to provide any collateral.
How marketplace loans work
There are now numerous marketplace lenders but the way things work is generally the same. You fill out a short application where you provide information such as your name, address, social security number, the amount of money you need and how you will use it. If your application is approved your loan request will be posted on the website’s platform for potential investors to review. In most cases it will stay there for 14 days. If your loan is totally funded before the 14 days, the money will be direct deposited to your checking account. If it is only partially funded before the end of the 14 days you may have the option of taking the lesser amount. If it’s not funded at all or for less than some required minimum such as 70%, then you’ll be out of luck. In this case, you may allowed to repost your request.
How much you could borrow
Again, all the marketplace lenders tend to provide loans ranging from $1000 to $32,000 – depending on the individual lender. The terms of these loans are almost always three years or five years. Your interest rate will depend on your credit worthiness. In most cases after you fill out an application you will be assigned a letter grade and your term and interest rate will depend on it. If you have good credit you’ll likely get an A, which means you’ll get the best interest rate offered by that lender and probably a three-year term. On the other hand, if your letter grade is a C or D your interest rate could be as high as 20% or even 30%.
How you repay marketplace loans
Every marketplace lender we’ve analyzed all require their loans to be repaid through automatic withdrawals. Some will allow payments to be made by check but generally charge an extra $15 per payment for this. There are also almost always late payment fees and in some cases origination fees that can vary from 1% to 5% of the amount of the loan. These origination fees are usually added onto the loan amount so that if you were to borrow $5000 with a 1% origination fee, your loan would actually be for $5050.
There are lots of options
Marketplace lending sort of exploded over the course of the past year Initially there were essentially three options –Lending Club, Prosper and Funding Circle. However, new marketplace lenders have been cropping up recently like crabgrass. In addition to the three noted above, there are Peerform, Upstart Lending, SoFi, CircleBack Lending, Pave, Borrowers First and probably others we simply don’t know about.
Lending Club, Prosper and some of the other marketplace lenders operate kind of like banks in that they will loan money to almost anyone for practically any purpose. Some of the other lenders tend to be more specialized. For example, SoFi provides loans only to graduates of Title IV universities and that have reasonably good credit ratings. All of the loans made by Borrowers First come not from individual lenders but from just one bank so it says that it’s able to qualify people and grant loans much quicker than some of the comparable marketplace lenders. And Funding Circle provides only business loans up to $500,000.
The downside
While there are many advantages to marketplace lending versus traditional lending it’s important to understand that it’s relatively new and totally unregulated. Banks provide safety in the fact that most belong to the FDIC and provide the same consumer protection regulations as Truth in Lending. In comparison, marketplace lenders offer no consumer protection. None have failed to date but this doesn’t mean there couldn’t be a failure. And if one does occur nobody knows what will happen to either its lenders or borrowers.