Marketplace lending is a recent high-tech innovation that is becoming popular. Lenders, often non-bank corporations, utilize online platforms and portable smart devices to provide potential borrowers with quick access to cash. This can be a useful option for credit card debt consolidation. There are risks that need to be considered.
FinTech & Marketplace Lending
The financial technology (FinTech) industry is rapidly changing the way credit is accessed. For lenders, this means new standards for how credit worthiness is determined. For borrowers, it means quicker access to credit. Both parties are taking advantage of easy-to-use tools that digitize the credit application process.
Smartphone and tablet apps, as well as online forms, mean that consumers are just a few clicks away from accepting a loan. At first glance, this is good news. However, there are hidden dangers that borrowers must understand to avoid credit problems.
Marketplace Lending Pros:
- Easier to Qualify – FinTech lenders have developed alternative measures to determine credit worthiness. They don’t rely solely on FICO scores and debt-to-income ratios. This gives more borrowers access to personal loans and other forms of credit.
- Quick Turnaround – Data can move very fast online. Consumers can have money available to them the same day they apply. This provides an alternative to dangerous payday or car title loans.
- Multiple Options – Online databases and search tools mean consumers can shop around. This gives borrowers more competitive debt consolidation options.
Cons or Dangers of Marketplace Lending:
- Risky Borrowing – Borrowers with bad credit can now qualify for loans. The FinTech loan they qualify for will likely have a high-interest rate. There could be trouble, though, if expenses increase or income drops unexpectedly.
- Too Quick? – The process is so fast and easy that borrowers may not carefully consider all factors before borrowing.
- Automatic Payment Requirement – Most FinTech lenders require automatic bank drafts as part of the repayment plan. Borrowers may struggle to maintain funds in their account. There is increased risk of overdraft penalties.
- Unclear Terms – Lenders don’t necessarily want borrowers to know what they’re agreeing to. It’s much easier to hide restrictive loan terms that could harm consumers in mobile apps. The Consumer Financial Protection Bureau (CFPB) recently started accepting consumer complaints about marketplace lending companies. This shows increased need for protections against predatory practices in the FinTech Industry.
There are a few other things to keep in mind if you’re considering a FinTech loan. It can be a good way to pay off a credit card balance and save money on interest. However, these loans should not be used for student debt consolidation. This will disqualify your student loans from certain federal protections. Marketplace loans are not a good solution for emergency expenses.
If you have a good use for a FinTech loan, shop around for a good rate and acceptable terms. Don’t rely on marketplace lending for the wrong reasons. Just because you can get a loan doesn’t mean you should.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.