It has been referred to as the biggest innovation in the financial services industry since the invention of the ATM, yet many people still have no idea what marketplace lending is all about. To simply put it, people looking for loans are paired up with investors willing to lend using a market place platform. Think of it as the Airbnb or Uber of the financial services world.
It’s really all part of the sharing economy that’s been changing how businesses think. Borrowers are looking for money that they might not be able to get from a bank, or perhaps they’re not happy with the interest rates being offered to them. Enter peers who are willing to lend, hence why marketplace lending is often referred to as peer-to-peer lending.
Peer-to-peer lending is still relatively new to Canada, but players like Grouplend and Borrowell have quickly established themselves as reliable lenders. There are plenty of other lenders and new players that keep coming online, so it’s not surprising that Canadians have responded positively to this alternative way of borrowing money.
How safe is it to use a peer-to-peer lender?
As a borrower, there aren’t that many risks. Lenders are the ones who are going to feel any pain if you default. There’s no hard credit check done when getting a quote with Grouplend, so it’s in your best interest to at least find out the interest rates available to you.
“In order to build the sort of trust that is required to properly service Canadians, marketplace lenders should embrace a high degree of transparency into the price and terms of their products” says Kevin Sandhu, chief executive officer of Grouplend. “We’re very clear with our range of interest rates (highest and lowest rates) and how consumers can improve their credit strength over time.”
That’s really what makes marketplace lenders different from a traditional lender. The whole point of a peer-to-peer loan is to help you reduce your debt. Loans are set at a fixed rate and term, so it’s a very attractive option for people who are looking to consolidate their debts.
Traditional lenders on the other hand have much bigger marketing budgets and sometimes advertise teaser rates or cheap loans. However, if you read the fine print, those loans could cost you a small fortune in the long run.
What are the advantages?
The most obvious advantage is lower interest rates, Marketplace loans can be had for as low as 5.9% APR—that’s a lot lower than the 19.99% you might be paying on your credit card. Of course rates can also be much higher; what rate you’re offered is based on your credit worthiness.
The other huge advantage is how quickly you can get access to your funds. Everything is done online. There’s no need to go to a bank to talk to a financial representative and then wait for your request to be approved and transferred over. Once approved, borrowers will most likely see the money deposited to their bank account by the next business day; some might even get access to their loan on the same day they apply.
Time will tell how many Canadians will embrace peer-to-peer lending, but in the US, more than $9 billion in loans have been approved by marketplace lenders. One thing for sure is that increased competition can only benefit us.
“As the industry grows, we’ll see more competitors active in the space and more niches being well serviced to benefit of more Canadians” says Sandhu. “New credit products, lower rates, and wider reach are in the works as we continue to grow and innovate.”
Peer-to-peer lending isn’t some fad that will just away on its own. Grouplend just raised $10.2 million in another funding round, while Borrowell has been working with federally regulated Equitable Bank for some time. The big Canadian banks haven’t gotten directly involved yet, but you can be assured that this kind of service is on their radar.