Online lending platforms, termed marketplace lenders, are a growing trend in the financial services industry. Marketplace lenders bring together lenders and borrowers using online lending platforms, which automate much of the loan process. This automation, and the lack of physical infrastructure, allows marketplace lenders to approve loans quickly, and often with lower rates than one might find at a traditional bank. Most marketplace lenders–including the two largest, Prosper, Inc. and Lending Club–use a third party bank to originate the loans.
When the industry started some 10 years ago, it focused on a peer-to-peer lending model, in which individual consumers borrowed money from individual investors who were looking for higher interest rates than they could get from their savings accounts. Today, small businesses are increasingly turning to online lending to secure financing, and most of the investment money comes from large institutional investors.
According to one report, marketplace lending volume in the U.S. hit nearly $30 billion in 2015, and is growing rapidly. Marketplace consumer lending, the largest segment, more than tripled from 2014 to 2015, from $7.64 billion to $25.69 billion. Businesses used online lenders to borrow more than $2.5 billion in 2015, more than double the amount they borrowed in 2014. Still, most borrowers use the funds to refinance old loans or pay off credit card debt. More than two-thirds of the loans made by Lending Club, the largest marketplace lender, are used for these purposes.
Marketplace lenders are required to comply with federal consumer financial protection laws, including fair lending laws and those governing disclosures about loan terms and costs. However, consumers still have reason to be concerned about these loans. Marketplace lenders are not subject to the same examination regime as more traditional lending institutions, and their algorithm-based underwriting models may not produce results that comply with fair lending practices. Another consideration for consumers is that these models often employ nontraditional data to assess borrower creditworthiness, such as that generated from internet usage and social media presence. Consumers may have no recourse if a lender is using inaccurate data, as their proprietary lending models are closely guarded. And, as with any business that retains important personal and financial data, privacy is a concern.
It remains to be seen how marketplace lenders will perform over time. These firms have come of age in a time of relatively low interest rates and favorable economic conditions, and have yet to face an economic downturn. Surely they represent an innovation with potential benefits for consumers, but warrant caution as well.
Consumers Union would like to know, have you ever used a marketplace lending company? What was your experience? Would you ever consider using one? Let us know in the comments.