What You Need to Know About Marketplace Lending
In the last 20-25 years, the internet has provided a plethora of lending options for borrowers of many types of businesses. While resorting to a direct lender for a short term business loan or other commercial loan, is still a viable option, marketplace lending has become more and more popular, providing a new means of borrowing for small and large businesses alike.
You don’t have to be internet-savvy to understand how it all works. Yet, there are some “fine points” to realize before you hit the web and start searching for new cash to inject into your business.
Marketplace lenders are non-bank financial institutions that use online “platforms” to connect consumers or businesses (who wish to borrow funds) with investors willing to invest in the loan. In most situations, once a loan is approved, the platform collects the principal and interest payments, then sends the payments (minus certain fees for platform) to the investors.
Available for new loans, or loans used to refinance existing debt, marketplace place lending offers some benefits compared to direct lending. Less paper work, time savings, and quicker approvals are a few of them. Plus, most loans have unsecured terms.
This may sound simple, but according to the Consumer Financial Protection Bureau here are a few aspects to consider before taking out a marketplace loan.
- Similar to any loan, determine how much you need to borrow and how much you can afford to pay back. This avoids any concerns, stress or other problems in the long term. Also, have a clear understanding on the terms of the loan. This includes the number of months you have to repay the loan, and understanding the penalties involved such late-payment fees or extra costs should the loan be paid off early.
- Interest rates can be a killer. Even they could be lower than a direct lender, always be clear of the “current interest rate being charged and whether that interest rate will stay the same or change over time.” If it will change, consider how often and how much.
- Try to determine how much you will pay once the loan is paid off. This may (or may not) include fees or other costs. The Consumer Financial Protection Bureau suggests using the annual percentage rate (APR) to determine or compare average yearly fees and interest-rate expenses over the term of the loan.
The Consumer Financial Protection Bureau states that as marketplace lenders are regulated under the same state and federal laws as other direct lenders, it’s best to “shop around.” This will allow you to learn more about marketplace loans, the advantages and disadvantages, and how much they will cost in the short and long term.