Your Next Loan Shouldn't Be From a Bank
By Maryalene LaPonsie
When Nicolas Castro needed some cash for his small business TeleMico, he didn't find much help at his local bank. So he went online, spent a few minutes filling out a form and had thousands deposited in his bank account in less than an hour.
He did it through Kabbage, a direct small business lender that didn't exist just a few years ago. Another he might have tried peer-to-peer lending, which Upstart.com founder Dave Girouard calls marketplace lending. Regardless of what you call it, the premise is the same. You bypass big banks and their stingy purse strings and instead get a loan through online platforms that either dole out money themselves or from multiple lenders.
The Evolution of Marketplace Lending
While peer-to-peer lending is as old as mankind, the online incarnation is significantly younger. "It was born five to six years ago, and 30 or 40 people might fund a loan for one person," says Girouard. The movement was named peer-to-peer lending for the fact it was based on individuals lending money to other individuals.
Today, Girouard says, institutional money is making its way into the industry, hence the shift to the term marketplace lending. In fact, Forbes reports that 80 to 90 percent of the money distributed today by pioneering sites Prosper and Lending Club comes from institutional lenders. In other words, the first peer in "peer-to-peer lending" has been replaced by entities such as large hedge funds. Despite the change in where the money comes from, the lending sites continue to provide a viable alternative to banks and credit unions when it comes to loans.
The specifics may vary by site, but online applications are typically simple and require only a few minutes to complete. Individuals may receive an instant decision on their approval amount and interest rate. Then, applicants may need to send in documentation such as W-2 forms to confirm their income.
After accepting a loan, individuals may find the money directly deposited to their bank account within hours or less, although some sites could take days to distribute funds. As with bank loans, there may be closing costs or an origination fee to pay.
5 Lending Sites to Consider
Marketplace lenders may provide cash for everything from a dream vacation to debt consolidation. Here are a few of the big names doing business in the industry today:
- Prosper. Arguably the originator of for-profit peer-to-peer lending in the U.S., Prosper offers loans from $2,000 to $35,000. As of this writing, interest rates range from 6.73 percent to 35.36 percent. The initial application asks for your address, income, credit score, loan amount and not much else.
- Lending Club. Another of the early peer-to-peer lending sites, Lending Club also lends in amounts up to $35,000. Current interest rates run from 6.78 percent to 29.99 percent. Its application process is remarkably similar to Prosper, with only basic information needed to get a rate quote. Its upcoming IPO would be largest U.S. tech IPO of the year.
- Kabbage. Kabbage is specifically for small businesses and offers lines of credit of up to $100,000. Repayments are made on a six-month term, with fees ranging from 1 percent to 13.5 percent as of this writing.
- Karrot. Owned by the same company as Kabbage, this website offers personal loans of up to $35,000 with repayment terms of either 36 or 60 months. Currently, you can get rates as low as 6.44 percent. The initial application is similar to Prosper and Lending Club, although Karrot also wants the last four digits of your Social Security number.
- Upstart. Targeting millennials who may not have the creditworthiness of more established borrowers, Upstart has a more involved application process. While still short, the application asks for information such as where you went to school, when you graduated and what you studied. "We built a model that ... looks at your employability," Girouard said. Loans from $3,000 to $25,000 are offered, with interest rates currently as low as 5.75 percent.
Marketplace lenders tend to be much more willing than banks to share the wealth, but that doesn't mean everyone who applies will be granted a loan.
Most sites require a credit score of at least 640, and you shouldn't expect to be approved if you have a serious delinquency or a bankruptcy on your record. Also, don't be fooled into thinking that because some sites don't ask for your Social Security number they aren't pulling your credit score. They are.
Self-employed individuals may also have difficulty obtaining a marketplace loan because their variable income can make them appear risky in lenders' eyes.
Lots of Lending Choices
For those who are eligible, there is an ever increasing number of lending sites from which to choose. Girouard likens it to the early days of the automotive industry in which dozens of firms sprang up, but only a handful eventually had any staying power. The former Google executive is obviously hoping his company will be one of those to come out on top.
For consumers, the competition between marketplace lenders could be a good thing and result in lower rates and more favorable terms. Because most companies do what is known as a "soft pull" when checking your credit, there's no danger to your score if you complete initial applications on several sites in order to compare their terms.
My advice is to shop around for the best deal but don't let the ease of application lull you into making a rash decision. Remember, you have to pay that money back. Rather than jump into a loan quickly, carefully consider whether you really need whatever it is you're financing, whether you can pay back the loan comfortably, and whether you could save the needed money and bypass the added debt completely.