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Ease, rate transparency help online lenders gain traction

Joel English found he could pay off debt quicker after borrowing from an online lender.

Ben Nelms/The Globe and Mail

Joel English wasn't shopping for a loan but after stumbling upon an online loan provider, it took less than three minutes to discover his credit-card interest rate could be cut by almost 7 per cent.

"I hadn't even been thinking about getting a loan to pay off my credit card, but when I found out how much money I could save – and how quickly I could pay off my debt – it was a no-brainer," says Mr. English, a 39-year-old telecommunications worker in Vancouver. "It was really easy to see the interest rates that were being offered and they were clearly lower than what I had."

It's hard for borrowers to shop around for loan interest rates. Unlike the mortgage industry, where rates are regularly posted, most loan customers have to enter a bank branch and complete a full loan application before finding out what their approved interest rate will be.

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The introduction of online loan providers, known as peer-to-peer or marketplace lenders, are now giving consumers an alternative to what's offered by traditional banks.

Besides the convenience of not having to visit a branch, marketplace lenders are able to provide another big bonus – transparency on loan rates.

Company websites clearly advertise their rates – which range from 5.6 per cent to as high as the low 20s, with the average interest rate hovering around the mid-teen mark.

"With Canadians repaying debt responsibly, delinquency rates in Canada have continued to decline allowing us to confidently lower our interest rates because we know Canadians repay their loans," said Scott Laitinen, chief risk officer at Borrowell, in a statement, after the lender cut its lowest rate to 5.6 per cent last month.

When discussing average interest rates for personal loans among Canada's big banks, the transparency tends to be murky at best. While online loan calculators provide consumers with approximate monthly payments, they do not provide information on estimated interest rates.

Among the big six banks, only two would discuss average interest rates for an unsecured personal loan.

The average rate for an unsecured personal loan at the Royal Bank of Canada is about 7 per cent, says Paul Sy, director of personal lending at RBC.

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National Bank of Canada's unsecured loan rates fall between 8 per cent to 12 per cent, says Benoit Hamelin, senior manager of financing solutions at NBC.

"If we see rates that are creeping much beyond 12 per cent, then it could be possible that individual has a risk profile that a loan product may not be the best option for them," Mr. Hamelin said.

Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Bank of Montreal would not discuss interest-rate averages, while Bank of Nova Scotia declined to comment.

Mr. English completed his application entirely online – including taking a photo of a void cheque and uploading it directly onto the website in order to receive and make payments.

He originally owned a bank-issued credit card with a 13-per-cent interest rate and a $100 annual fee. Last year, the bank discontinued the low-interest option and increased the interest rate to 19.9 per cent – and Mr. English was carrying a $15,000 balance.

"It was a relief to find out that I could get rid of this debt in just three years and save over $5,000 in interest," he adds.

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The day after he filled out the online application, the $15,000 was deposited in his bank account.

The personal loan market in Canada is $532-billion and growing at a modest 2.8-per-cent pace, according to an April report by financial-services research firm McVay and Associates Ltd. The banks are the dominant players in the lending business, with about 85-per-cent market share.

But this could shift as more consumers migrate to online lenders. According to a recent Canaccord Genuity research paper, three quarters of Canadians reported using online banking in 2014, with 55 per cent of them using the Internet as their main method of banking.

RBC has an online loan application process, but for the majority of the banks, an in-person interview is required to get a loan.

"Loans and lines of credit are a more sophisticated loan product and you have to sit down and talk about how much you can afford each month, how long you want to take to pay it back, what are you holding today and how we can save you money," RBC's Mr. Sy said. "It is a much more in-depth advice conversation."

The banks say the lending side of the business is much riskier than mortgages, and without the collateral of a home, so the application is more personalized and products have a wider range of rates.

Marketplace lenders are fairly new within the Canadian industry, but there are already a handful of them offering personal loans up to $35,000.

Grouplend has seen over $100-million in loan applications since January. Borrowell launched its platform in April and hit $90-million in applications last month. OnDeck Capital provides online loans to small businesses, while online lender Mogo Technology is expanding to include a marketplace lending platform.

Online lenders use technology to evaluate borrowers, says Dave Feller, chief executive of Mogo Finance Technology, which processes 30,000 loans a month.

"Our algorithms can capture the typical data points, but we can also look at IP addresses, links to social media and how long they have spent on certain websites," Mr. Feller said. "This information can help us determine if there is credit worthiness but also if there is a fraud alert on the application."

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About the Author
Globe Investor Reporter

Clare O’Hara is a reporter at The Globe and Mail. Prior to that, Clare spent eight years as a staff writer at Investment Executive, a national newspaper for financial service industry professionals. More

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