Slideshow Get to Know Your Marketplace Lenders

  • February 22 2016, 11:00am EST
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The terms "peer-to-peer" and "marketplace" lending are often used interchangeably to define all manner of loans made through the Internet. The reality, though, is that aside from lacking storefronts, the many firms now operating in this arena have little in common with one another. Here's a guide to help tell them apart.

Debt Consolidation Lenders

Both Lending Club and Prosper Marketplace launched about a decade ago, when online lending was in its infancy. Last year they combined to originate about $12 billion in loans, with publicly traded Lending Club, led by Renaud Laplanche, accounting for more than two-thirds of that total. While both firms have made forays into other loan categories, their bread and butter remains debt consolidation loans to consumers. Newer entrants into this lending segment include Upstart, which focuses on recent college graduates who have limited credit histories, and Vouch, which offers reduced interest rates to borrowers who can persuade their friends to stand behind a portion of the loan.

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Subprime Lenders

Many of these firms' customers cannot qualify for a loan from Lending Club and Prosper because they have marred credit histories. In some cases, their loans resemble traditional payday loans. In other instances, the loans feature longer terms and lower annual percentage rates. The biggest of the bunch is Chicago-based Avant, which has raised more than $300 million in equity financing since it was founded in 2012. Avant, founded by Al Goldstein, offers multiyear personal loans between $1,000 and $35,000. Other competitors include ZestFinance, which offers high-cost installment loans of $800 or less, and LendUp, which also charges high interest rates to new customers but allows repeat borrowers to qualify over time for lower rates.

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Student Loan Refinancers

These firms are pursuing almost the opposite strategy of the subprime lenders, seeking out well-qualified borrowers who are paying relatively high interest rates on federal student loans, and offering to refinance that debt at lower rates. CommonBond, headed by David Klein, left, has taken the low-risk lending strategy to an extreme. As of early January, not a single CommonBond loan had defaulted or gone 30 days delinquent. Earnest, which announced in November that it had raised $75 million in new equity financing, is another competitor in this segment. Its CEO is Louis Beryl.

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The Firm That's Out to 'Kill Banks'

Not so long ago, Social Finance would have been counted among the student loan refinancers. But SoFi's ambitions have grown alongside its balance sheet, and today the San Francisco company has positioned itself to become a wide-ranging provider of financial services to its young, upscale clientele. SoFi currently offers refinanced student loans, personal loans and mortgages. And following a $1 billion equity investment from a Japanese telecommunications company, the company has designs on wealth management and even deposit taking. SoFi CEO Mike Cagney, formerly of Wells Fargo, recently raised eyebrows in the industry when he said that he wants to "kill banks."

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Point-of-Sale Lenders

With e-commerce enjoying strong growth, various online lenders are offering ways for consumers to finance purchases at checkout.

PayPal, whose CEO is Dan Schulman (pictured), was an early entrant in this segment with its Bill Me Later product, now called PayPal Credit. Affirm, which is headed by former PayPal co-founder Max Levchin, is another competitor. Lending Club, Prosper and Amazon have all been eyeing this market, too.

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Firms that Offer Small-Business Term Loans

OnDeck and Kabbage offer term loans to small businesses that often can't qualify for traditional bank loans. OnDeck, led by Noah Breslow, lends mainly to mom-and-pop shops — think bakeries, florists and restaurants — that need $50,000 or $100,000 or $200,000 to buy new equipment or purchase inventory. OnDeck started out as a balance-sheet lender, but it recently took a big step toward becoming more of a technology provider when it struck a deal with JPMorgan Chase that will enable the banking giant to make online loans to its small-business customers. Kabbage has a similar hybrid model — making loans in some situations and licensing its technology in others.

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SBA Lenders

Tech upstart SmartBiz has built a platform that aims to take the pain out of applying for a Small Business Administration loan. Using SmartBiz' online application, business owners can prequalify for loans of up to $350,000 in a matter of minutes. If they are ultimately approved, the funds could arrive within a week. Interest rates range from 6.25% to 7.25% and fees can add up to about 4% of the loan's value, though SmartBiz offers discounts on fees if business owners apply through Sam's Club stores. The loans are funded through Golden Pacific Bank in Sacramento, Calif.

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Merchant Cash Advance Providers

These companies are sometimes described as subprime small-business lenders, because they provide high-cost cash to firms that cannot qualify for bank loans. Unlike a term loan, which has a fixed repayment schedule, a borrower that takes out a merchant cash advance agrees to turn over a percentage of future sales to the lender.

Capify, headed by David Goldin, CAN Capital and Credibly are among the online lenders competing in this market. The large payment companies PayPal and Square offer similar products to merchants that use their networks.

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Invoice Finance Lenders

BlueVine is an online-only lender that offers small firms advances on their unpaid invoices. The application process is 100% automated and, once approved, borrowers can get cash for that first unpaid invoice within 24 hours and even sooner for subsequent invoices. The two-year-old BlueVine recently raised $40 million in fresh capital.

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