March 26, 2015
Peer-to-peer lending, or P2P, has continued to grow in popularity as banks become a less attractive option for smaller businesses or consumers looking for mid-range to lower-level loans.
We discussed two of the best-known alternatives for personal loans (Lending Club and Prosper) in a previous article, but let’s take a look at a few of the choices that have sprung up to meet particular lending niches.
- Upstart – Upstart is another crowdfunding venture for personal loans, but their emphasis is on those who may not have established enough of a credit history to get a traditional bank loan. Their analytical software assesses risk by taking into account factors such as your schooling (where you attended, your field of study and academic performance) as well as your employment history.
Once your record is assessed, you are given a Loan Grade similar to bond ratings (AAA to D), with corresponding interest rates ranging from 5% to over 25% and origination fees ranging from 1% to 6%. Origination fees are taken off the top of the loan prior to disbursement.
- Kabbage/Karrot – Kabbage is targeted mostly at online merchants who have difficulty securing bank loans, while its newer venture, Karrot, handles personal loans. (Will their next venture be called Kucumber? Or Kukumber?)
Kabbage is fee-based. Loan terms are generally 6 months, with monthly fees anywhere between 1% and 13.5% of the loan amount in the first two months, depending on risk level, and 1% for the remainder. You can pay early without incurring other fees.
While it may not be pitched as interest, you are effectively paying a monthly interest rate and that effective rate depends on whether or not you pay off the loan early. It’s easy to get fooled by a monthly rate and pay more than you realize.
To compare with alternative lending services, calculate the effective annual interest rate in the case you hold the loan for the whole six months and if you pay it off at an arbitrary early time (say three months). Then you can determine if Kabbage’s (or Karrot’s) flexibility is worth the potential costs.
- OnDeck– OnDeck focuses on small business financing and pitches itself as an alternative to a cash-advance method. Loan terms are from 6 to 24 months with fixed payment plans. Origination fees are 2.5%, and average loans are in the $25,000 – $50,000 range.
Interest rates can be quite high – the 24-month loan term ranges from a 19.99% to a 39.99% APR – but OnDeck fits a useful niche for young small businesses with promising revenue (over $100,000 annually) but personal credit scores that makes bank loans problematic (OnDeck accepts credit scores of 500 or above).
- DealStruck – DealStruck positions itself as a hybrid between crowdlending and traditional financing mechanisms. It offers several different methods of lending on its online platform – including traditional loans, loans secured against future revenue or lines of credit secured against business assets (accounts receivable). Loan terms are available for up to 3 years, with $250,000 limits.
You now have a dizzying and potentially confusing set of options to choose from when seeking bank alternatives to personal or business loans. The above companies are just a few of the many lenders that continue to pop up each year.
To make the best choice for you, it is important to assess the details of your payment options and put them into equivalent interest-rate terms. It is also wise to check online reviews of the companies at sites like CreditKarma.com.
However, the speed and ease of these online platforms make it easy to simply sign up without making direct comparisons. Resist the urge to dive right in without comparison-shopping… and do not completely rule out traditional lenders as viable choices.
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