Marketplace lending is an excellent option for borrowers who have difficulty securing a conventional loan or feel that bank products do not meet their needs. For lenders, it is an investment opportunity with the potential to pay significant returns. Here’s your beginner’s guide to marketplace lending.
What is marketplace lending?
Marketplace lending is a way for borrowers to obtain loans from lenders without involving traditional banks.
Instead of approaching a bank for a loan, borrowers use a non-bank financial institution to connect with a lender for a fee quickly. On the other side, lenders provide loans to borrowers as an investment opportunity.
Marketplace loans are faster and easier
While banking has made great strides in entering the digital world, marketplace loans are still quicker and easier to obtain. In addition to using their technology better, marketplace lending is not subject to the same regulations and scrutiny as traditional loans provided by banks. Therefore, applying for a marketplace loan can be more straightforward than a bank loan.
Many borrowers do not qualify for a traditional loan due to their debt-to-income ratio, credit score, or other factors. Marketplace lending considers factors beyond these, so most borrowers would still be able to obtain a marketplace loan.
Marketplace lending can be a faster and more beneficial option for small businesses that need a loan quickly. You can obtain small business loans in less than twenty-four hours in the marketplaces instead of days or weeks at a bank.
Marketplace lenders are not banks
Marketplace lenders are non-bank financial institutions that connect lenders to people who need a loan. Marketplace lenders use technology to process loan requests efficiently and make profits by charging a fee for these services.
Banks take deposits from people and then use them to provide loans to their customers. Unlike marketplace lenders, banks make money from the interest they charge on their loans. Marketplace lenders do not take deposits or charge interest on loans but rather make their money from the fees they charge to connect borrowers to lenders.
Remember that marketplace lenders do not provide you with money directly but connect you to a lender who provides you with the loan as an investment. This method means marketplaces are not subject to the same regulations as banks.
Marketplace lending can be riskier than traditional lending
Borrowers with poor credit or debt-to-income ratios might qualify for a marketplace loan, but that doesn’t mean they will find a good loan. Many will end up borrowing money at a very high interest rate or with unclear terms set by the lender.
These situations are more likely in marketplace lending than traditional lending because borrowers often rush into the loans without research. The process can be swift because of the technology used to make it happen.
The industry is also largely unregulated, so it is up to the borrower to take the time to understand what they are signing when accepting a marketplace loan. In fairness, conventional banking also tends to come with hidden fees that many customers are unaware of until too late.
Marketplace lending can be risky because most loans are unsecured and uninsured by the FDIC. If a borrower defaults on their loan, there is no collateral for lenders to take back. Lenders can mitigate this risk by deciding how much risk they are willing to take before lending in the marketplace. On the other hand, sources like Forbes assert that marketplace lending might not be as risky as people think it is for lenders.
Marketplace loans can be an excellent way to pay off a credit card balance
Marketplace loans can help borrowers pay off their credit card balance and save money on interest. Many borrowers in the marketplace accept loans for this reason.
If you are going to seek a marketplace loan to pay off your credit card debt, be sure to shop around before you accept one. While you will likely qualify for numerous loans and be able to obtain them quickly, make sure that you are taking one with a reasonable interest rate and good terms. Avoid rushing into a marketplace loan just to get the money faster.
Marketplace loans should not be used to consolidate student loan debt
Some borrowers hope that marketplace lending is the solution to their student debt problems, but this route is not the best way to use marketplace lending.
Once you use marketplace lending to consolidate your student loans, your loans will no longer qualify for any federal protections they had previously. Consolidating your loans in the marketplace and losing these protections is almost always a poor financial decision.
Marketplace lending can be an excellent solution for borrowers who do not qualify for traditional loans and for lenders looking for an investment. However, these financing solutions are not the best option for every situation and can carry more risk than conventional lending. Be sure to do your research and take the time to understand any marketplace loan before rushing into it.