Online lending to small businesses that don’t qualify for bank loans is booming. Sub-prime and Wall Street were blamed for the last crisis, but it was a prolonged period of too low interest rates that motivated investors to move capital into risky areas of the financial markets. Is the Fed making the same mistake again? The WSJ has the story. Emphasis is ours.
The growth of online lending has been a boon to hair salons,
bakeries and other small businesses that don’t qualify for bank credit. Yet
this tech-enabled source of credit can mire some in debt they can’t repay,
raising concern about inadequate regulation.Some are extending credit at sky-high rates with opaque terms for costly fees
and conditions, drawing comparisons with payday lenders who target consumers
in need of quick cash, according to critics….
Most of the lenders don’t make their fees public. An exception is On Deck
Capital Inc., one of the few that is publicly traded, which charged annual
rates ranging from 9% to 98.3% in the quarter ended September, with an average
of 45%. By contrast, long-term bank loans guaranteed by the federal Small
Business Administration currently are offered to borrowers, with fairly good
credit histories, as low as 7%….But beyond the high interest rates, the complex structure of some products and
opaque disclosure make it difficult for borrowers to understand costs….
However, online lenders have filled a void left by banks that have limited
small-business lending since the financial crisis because it was risky or
unprofitable. While they are increasingly important sources of capital, online
lenders’ long-term prospects remain uncertain, according to experts.Unlike banks, which fund their loans from stable pools of consumer deposits,
online lenders mostly raise capital from hedge funds and other investors —
money that could evaporate in times of financial turbulence.“The online lending industry is not yet old enough for two things,” said
Adrienne Harris, a University of Michigan professor and former Obama
administration Treasury official. “One, to see how it performs in a downturn
or a credit crunch. Two, nobody has really done the analytics to evaluate the
trade off of increased access to credit with potentially increased cost.”
