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What is “Marketplace Lending?”

“Marketplace lending” describes a set of market-making services that match individual borrowers to lenders through an online platform that underwrites the loan and facilitates the transaction without the involvement of traditional banks or credit card companies.

The lending platforms offer information about the credit-worthiness of the borrower, and investors then take positions in the notes in what is essentially an auction. Investors usually accept fractional shares in large numbers of individual notes so that the occasional default will not significantly impact their returns. Once a note attracts sufficient investors, a loan is originated and serviced. Platforms charge borrowers a one-time origination fee and lenders a monthly service fee.

Marketplace loans are typically funded by specific individuals or institutions that are lending their own money, often on a fractional basis, at interest to specific borrowers. For example, a note of $100,000 to a small business may be funded by $1,000 investments from 100 different lenders. Interest rates are a function of the calculated risk that the borrower will repay the loan and range from as low as 6 to as high as 25 percent. As borrowers repay the notes, the principal and interest
payments are apportioned to the individual lenders in proportion to their fractions.

Each marketplace lender deploys sophisticated underwriting algorithms to assess the credit-worthiness of borrowers. Lending Club, for example, rejects individual applicants with FICO scores lower than 660 and debt-to-income ratios below 30 percent, a set of thresholds that it says excludes over 80 percent of applicants.

This article is a sidebar to Marketplace Lending to the Rescue


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