Today’s alternative lending market includes several major types of lenders:
- Marketplace lenders
- Direct private lenders
- Crowdfunding platforms
Marketplace lending platforms use technology to process loan applications, screen applicants and connect qualified applicants with potential lenders. Marketplace lenders package loans from lenders and deliver them electronically to borrowers, instead of using deposited money to provide funds the way a bank would. The marketplace lender collects a commission and fees for this service.
Direct private lenders finance loans with their own money instead of using bank depositors or investors. This gives them wide discretion over loan qualifications and terms. For example, a direct private lender might be willing to lend a smaller amount of money than a conventional lender would normally consider.
Both marketplace lending and direct private lending as described above are often referred to as P2P lending. However, technically, P2P lending involves lending from an individual to a borrower, while marketplace lending can allow financial institutions as well as individuals to lend money, and more often involves institutions.
Crowdfunding platforms provide a digital platform which borrowers can use to raise money by asking large numbers of investors to contribute small amounts.
The remainder of the content below will focus on marketplace lending, although some of it applies to other categories of alternative lending.
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