This is part of a Globe series that explores our growing dependence on credit – from the average household to massive institutions – and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge
As Canadians rack up credit at a record pace, a new type of lender – with a technological twist – is emerging as yet another borrowing option.
Positioning themselves as an alternative to more traditional, high-interest options, online loan providers – commonly referred to as peer-to-peer lenders – are looking to shake up Canada's consumer-lending business in the way travel website Expedia.ca and mobile taxi application Uber transformed their industries.
And consumers are buying in.
Online lenders entered the Canadian marketplace six months ago with the launch of Grouplend Inc., a Vancouver-based firm, has seen $60-million in loan applications since January. While the firm hasn't released numbers of how many of those loans are approved, it's clear that consumers are looking for options. A second provider, Borrowell Inc., launched its platform last month.
"We are looking at middle-class prime-quality Canadians," says Kevin Sandhu, Grouplend's founder and CEO. "We believe we provide an alternative to the mainstream financial services that are overpriced, poorly constructed and inconvenient for many Canadians."
Globally, online providers have enjoyed rapid growth. In the U.S, LendingClub Corp. and Prosper Marketplace Inc. had facilitated $9.3-billion (U.S.) and $3-billion, respectively, in online loans as of March, 2015.
For many, particularly millennials who are already adopting mobile banking and robo-adviser platforms, the idea of online borrowing represents a logical evolution.
The concept behind Uber-like banks is fairly simple. Providers of capital are connected online with individuals looking to borrow.
Canadians can apply for loans up to $35,000 (Grouplend caps loans at $30,000). But to qualify as a borrower, you must have a credit score of at least 660 for Borrowell and 690 for Grouplend.
Through a calculated algorithm, the platforms are able to assign risk ratings to each applicant. After answering an online questionnaire, a personalized interest rate is determined. The rate not only factors in an applicant's credit score, but also credit history, employment income and how much credit the person has available.
Borrowers also need to have a history of making debt repayments on time.
Interest rates range anywhere from 5.9 per cent as high as the low 20s, with the average interest rate hovering around the mid-teen mark (much lower than what most banks and credit card companies are offering).
Payments can be made over a three-year period, or paid out early without a penalty.
For those looking to invest, the process isn't quite as simple.
In Canada, regulatory requirements restrict who can be a provider of capital. At the moment, only institutions and accredited investors can invest funds to the platform, although this could change over time, says Mr. Sandhu. An accredited investor generally has to have minimum individual income of $250,000.
For those who do qualify, investors in this asset class typically earn 7- to 9-per-cent net return after fees. But if a borrower fails to repay, the investment is at risk.
To ensure those applying for loans are meeting certain requirements before they are approved, the transactions are managed by intermediary parties.
Not to be confused with online payday loan providers, marketplace lenders are targeting a niche clientele. More than half of the online applicants in Canada are looking for lower interest-rate options to pay off high-interest debt.
"A lot of people are asking 'how do I get out of this debt?' We think there's a lot of talk about the problem and less about the solution," says Andrew Graham, CEO of Borrowell. "Unlike a credit card, a loan from Borrowell gives you a personalized interest rate. The more diligent you have been at paying debt in the past, the more you will be rewarded with a lower rate."
But there are risks.
A 2014 report by the payday lending panel stated there is an industry concern that the growth of online and mobile borrowing may lead to more spontaneous or impulsive borrowing by consumers. In addition, because these online services may be easier to access than a physical store, borrowers may be less likely to consider other options before taking out a loan.