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.
How did he do it? Through Kabbage, a direct small business lender that didn’t exist just a few years ago. Another option he might have tried was peer-to-peer lending. Or, as Upstart.com founder and CEO Dave Girouard told me in an interview, something more properly known as 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.
Money Talks News finance expert Stacy Johnson talked to Castro about his experience, and you can see what he had to say in the video below. After watching, keep scrolling to learn whether you too can use marketplace lending to get the cash you need.
The evolution of marketplace lending
While you could say 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 In other words, the first peer in “peer-to-peer lending” has been replaced by entities such as large hedge funds.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.
- 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.