Marketplace loans started out as relatively low-balance loans extended to consumers through peer-to-peer exchanges. Now, the sector is leading the share of volume of outstanding unsecured personal loans.
In 2018, marketplace lenders boosted their share to 38% of the overall $138 billion market of unsecured personal loans, which itself grew 18% from 2017. That bests banks (28%), credit unions (21%) and traditional finance companies (13%), according to data from TransUnion consumer credit in a DBRS commentary, “U.S. Unsecured Personal Loans – Marketplace Lenders Continue to Expand Market Share.”
Six years ago, fintech lenders had only a 5% share.
Exactly how did a sector whose origin was to cater to borrowers who needed emergency funds in the form of personal loans, grow into the leading source for borrowers?
Marketplace lenders tend to have lower interest rates than payday and non-bank finance companies that cater to subprime borrowers, but offer loan terms and sizes equal to that of prime-lending banks. That is due to underwriting advancements have allowed the fledgling sector to flourish, DBRS stated.
Specifically, digital loan underwriting has improved to the point where it that can compete with what traditional lenders use, according to DBRS. Upstart, for instance, adopted artificial intelligence and machine learning to develop its methods for credit underwriting and pricing. It incorporated such attributes as the borrower’s education and employment history among others.
The sector’s credibility received indirect support from the Consumer Financial Protection Bureau, which in September 2017 found that Upstart’s innovations did not impede fair lending practices in initial results, according to DBRS.
The opportunity to sustain growth is wide open, given the “currently low penetration” of unsecured consumer loans – only 7% of consumers hold personal loans, compared to 30% for auto loans and 63% for credit cards, the report stated. Much of the source of growth for MPL lenders lies with the demand for loans to conduct debt consolidation and credit-card paydowns, DBRS noted.
Operators in the marketplace loan sector must deal with a couple of important caveats, however.
Traditional lenders still pose tough competition, because they have been able to adapt some of the newer sector’s more nimble features. For one, traditional lenders have been able to speed up lending processes for their clients, and they have improved customer service, according to DBRS.
Second, marketplace lenders have yet to prove whether they can operate profitably over a sustained period. Although they have at least a 10-year history, marketplace lenders have not been tested by a recession or any other serious economic downturn, according to DBRS.
