Categories: Finance

What is “Marketplace Lending?”

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


John Kador

John Kador is a business author based in Lewisburg, PA. His last book is What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Million Dollar Business (with Brian Cohen, McGraw-Hill).

Share
Published by
John Kador

Recent Posts

A CEO State Of Mind—In County Government

Why companies like Nokia are betting on Middlesex County, New Jersey—where smart governance meets private-sector…

2 days ago

How Kardex Remstar Is Working To Build American Automation

The warehouse automation equipment maker is investing in a strong supply chain by building production…

2 days ago

Six Questions To Bring Insight Back To Strategy

Strategy processes are getting squeezed. Answering these questions will set you up for building and…

2 days ago

Reliable AI Agents

The key lies in a progressive implementation of control mechanisms, each adding a new layer…

2 days ago

CEOs Of The Year On Succeeding In The Top Job

To celebrate the 40th CEO of the Year, we share some lessons learned along the…

2 days ago

‘A Good Time To Speak Up For Business’: The 2025 CEO Of The Year Celebration

Chief Executive Group CEO Marshall Cooper opens the 40th annual celebration, this year honoring Lilly’s…

3 days ago