Peer to peer lending is the process of willing investors putting up their own money to be loaned to everyday borrowers like you and I making the process of loaning and borrowing money simpler and more accessible to everyone.
This form of lending has been facilitated by the rise of the internet and has been around in the United States for quite a few years now but has never really caught on in Canada. My understanding is that this is because the investing regulations are much more strict north of the border so it has taken us longer to get the ball rolling.
I’m all for people having options when it comes to loaning money which means increased competition, lower interest rates, and fewer people taking out predatory payday loans. That’s good for everyone!
So, when Andrew Graham, the CEO of Borrowell, contacted me about getting the word out about this new form of lending in Canada, I thought it would be a great opportunity to ask him some questions about how it all works and share that information with you.
1. For those that don’t know, what is peer to peer (P2P) lending anyway?
Peer-to-peer lending is a new kind of lending that is taking off worldwide and disrupting traditional banking as we know it. Also known as “marketplace” lending, it’s a smarter and more efficient new way for people to borrow. Using a similar approach to Airbnb, P2P lending matches people who want to borrow with lenders who want to invest. Operating exclusively online helps to cut down costs and save time compared to many traditional lenders.
Marketplace lending is disrupting traditional borrowing. In the US and UK, online marketplace lenders have served over one million customers to date. Goldman Sachs estimates online lending could grow to take over $1.7 trillion of an addressable $4 trillion of debt. In the past year, the industry has seen rapid growth and has been named 'Innovation of the Year' by American Banker.
The reason why it’s taking off? Simplicity, affordability and the smart use of technology. In April, JP Morgan CEO Jamie Dimon warned that "Silicon Valley is coming." Financial technology is taking away the pain points associated with traditional banking. Using technology, we can be smarter, more versatile and more efficient than the banks.
2. This type of lending has been around in the USA for a while now but has only recently come to Canada, why is that?
You’re right − the US marketplace lenders have been very successful. The largest, Lending Club, went public on the New York Stock Exchange in 2014 and has funded over $9BN in loans since 2006.
We were watching this success across the border and wanted to bring the same model to Canadians. Of course, Canada has its own regulatory environment and our consumer market is also different from the US. The good news is the Canadian financial sector is one of the soundest in the world, which means Canadians have a different relationship with their banks than Americans. We launched this spring, and believe the market is ready to embrace marketplace lending! And it’s evident with the number of loan applications we have processed in the past 4 months – over $70 million.
3. Will people save any money over standard unsecured bank loans?
The technology behind marketplace lending allows us to offer rates tailored to an individual applicant based on their credit history, income and borrowing history, so rates are competitive with what the banks are offering. Technology also allows us to quickly and easily adjust interest rates based on debt trends. For example, just recently we reduced our lowest APR from 5.9% to 5.6% because debt trends in Canada were reporting improved delinquency rates. We can do this almost immediately while banks typically take a much longer time to respond to debt trends nationwide.
Beyond just price and rate comparison, borrowers get a better customer experience. You can apply from the comfort of your own home in a matter of minutes and get an interest rate customized to you. The rest of our process is all online too − ID verification, signing loan agreements, right through to funding. A customer can have her funds within 2-4 days of her initial application. The process is simple, secure and fast.
With marketplace lending now in Canada, it’s a great alternative to what can be a time-consuming and frustrating process of applying for a loan with a bank.
At Borrowell, we are also educating Canadians on good personal finance habits and promoting financial responsibility. Sustainable lending is fundamental to our company ethos and business model. We assess the affordability of loans we offer a borrower, to make sure the monthly payments are manageable. A line of credit from a bank effectively acts as a large credit card, encouraging people to draw on credit without paying off the balance. Borrowell’s loans are fully amortizing, meaning monthly payments reduce the loan balance and at the end of the term the loan is fully paid off.
4. Are your loans easier to be approved for?
As with any lender, we have a comprehensive underwriting policy. The minimum criteria to qualify for a loan via Borrowell include:
- A minimum credit score of 660. Two credit bureaus, Equifax and TransUnion, provide credit scores that range from 300 to 900 (the higher the better). About 85% of Canadians have a credit score of 660 or higher.
- Applicants need to be a Canadian citizen or resident; have reached the age of majority in his/her province; and have a minimum credit history of 12 months.
Borrowell is able to provide loans to residents of all provinces except Quebec and Saskatchewan.
In addition to credit score, our process takes into account a number of additional factors including income, borrowing history and current loans.
5. What other advantages do P2P loans have over more traditional loans?
The key thing here is customer service. By embracing technology, marketplace lenders are able to provide better rates and offer an easier loan process. Technology really is making lending smarter, and this is where we see banks are missing the mark and have been for years. We've heard the stories from many of our customers – going through the loan application process with a bank can be time-consuming, inconvenient and confusing. The customer is losing out.
From start to finish, everything is done online and the applicant is in full control of the process. We send borrowers their loan agreements electronically to review and sign, and linking a customer’s bank account is done quickly and securely on our website application. The applicant is in control of the entire process.
Customer service is so important to our company because we believe it’s the whole point behind what we’re doing – online shouldn’t mean impersonal. Although we’re an online company, we are available by phone or via email to help you whenever you need us.
6. Is there any extra risk with P2P loans for the borrower, like an increased chance of the loan being called early?
No. There is no extra risk for someone borrowing from a marketplace lender compared to a traditional financial institution. For example, our loans are at fixed rates, for 3 or 5 year terms, with equal monthly repayments. The monthly payment will never go up, and a loan cannot be called early by the lender. On the contrary, a borrower can repay part or all of her/his loan at any time with no fee or penalty.
Marketplace lenders are subject to stringent regulations. In Canada, they must conform to province-by-province regulations that govern financial transactions with consumers. For example, marketplace lenders must properly disclose all fees and the total cost of borrowing. They must also respect privacy and anti-spam regulations. Second, marketplace lenders must respect securities laws when taking money from investors. These also can vary province-by-province.
7. How does P2P lending work at Borrowell and how are you different from your competition?
The marketplace lending model has been incredibly successful internationally. We’re using that business model to provide a new lending option for Canadians. As a marketplace lender, Borrowell is focused on providing new loan options to consumer borrowers, stable returns to our investors, and great service to both. Both sides of the market rely on Borrowell to be a trusted, responsible counterparty they want to do business with.
Among Canadian marketplace lenders, Borrowell offers the largest range of loan options, with fixed rate loans up to $35,000 and a choice of 3 and 5 year terms. Our rates start at 5.6% APR. We’re also very proud of our excellent customer service team! We’ve had lots of great feedback so far.
Our team also has a wealth of experience in the Canadian financial services sector. I worked at PC Financial along with our Chief Risk Officer, and our Head of Capital Markets, Norm Cappell, comes from Bay Street where he worked at RBC.
8. Who are the investors funding these loans and if my readers were interested in becoming investors, is that possible?
We partner with accredited and institutional investors − our platform has been built with both in mind. We’ve secured initial funding with top quality partners in Equitable Bank and Oakwest Corporation. Equitable Bank is the 9th largest Schedule 1 bank in Canada, with $13BN in assets under management. Oakwest Corporation is a respected Canadian private investment corporation.
In Canada, we can’t take individual retail investors on as lenders, so we have focused on institutional lenders. We are in discussion with many potential lenders, including banks, asset managers, life insurance companies, pension plans and family offices. We expect to expand and diversify our base of funding partners as we grow.
My Take On P2P Lending And Borrowell
I definitely like the idea of P2P lending and the fact that it has finally come to Canada. This is going to put pressure on the banks here to finally wake up and compete a little bit instead of gouging consumers as badly as they have been.
Not only that, but this form of borrowing is simply a lot more convenient than doing a standard loan application through the banks. Sure, they have moved portions of their process online, but it is still cumbersome and pretty manual at most banks. I’ve tried the initial stages of the loan application process with P2P lenders just to see what it was like and then compared it with the online process of a couple of banks. It is SO MUCH smoother, easier, and more transparent with the P2P lenders.
I also love that these loans are for a fixed period of time, which encourages people to actually pay them back and manage their debt responsibly. Carrying debt long term, unless you have a very good reason to do so, just doesn’t make much sense and can give you lots of financial headaches. With Borrowell, you’re guaranteed to pay off your loan in 3 years and you can pay it down much faster or eliminate the debt instantly if you so desire - there are no restrictions or fees for faster repayment!
This article was sponsored by Borrowell.