So, we talked about crowdfunding. What about peer-to-peer lending? This has been around for a while. And, it has some advantages- but it won’t fund a company. It could possible get a small company out of a jam. And, it certainly can work for certain individuals. But, the limit of the loan via this process seems to be about $35K.
Right now, there are two “big” players- Prosper Loans Marketplace, Inc (http://www.prosper.com/ ) and the Lending Club Corporation (https://www.lendingclub.com/ ). Here’s how it works. You go to their site and request a loan. These firms obtain credit criteria and vet you. Then, they post your request for others to see. Potential funders can examine your request (stripped of your personal information) and credit; if they decide you meet their criteria, they loan you the money. (Actually, they only loan you part of the money- the increments are $25, so you can see that lots of folks contribute to your loan.) When you pay back the loan, the repayment (plus interest) is allocated among those who funded your loan.
Why would folks borrow this way? Because the interest and costs are at least as good (and the credit somewhat easier) than that of conventional authorities. Assuming you pass the vetting, you can expect your loan rate to be between 6 and 35%, with an average rate of about 13% over 3 years. (Those rates are about the same as credit card loans.)
Many applicants wash out in the vetting process. Those who are approved are quoted an interest rate based on the credit risk. Lending Club says annual interest rates range from 6% to 26%, with the average rate for a 36-month loan around 13%. Prosper says rates range from about 6% to 35%.
Why would folks loan their money this way? Because they can get better yields than they can with savings, with bonds, and the like. So, they are willing to provide unsecured high-interest rate loans.
How much money is handled this way? Prosper is loaning about $ 30 million a month. In 2012, these folks loaned a total of $ 870 million or so, which was about twice what they did the year before. And, about 10X the volume they did in 2008 when these loaning authorities were first founded.
And, it’s not just your money or my money that are involved in this process. These loan authorities are well capitalized. Prosper received some $ 10 million from Sequoia Capital (with $ 10 million more from others). Lending Club is sitting on about $ 125 million from Google and others (and it is preparing to go public very soon).
These peer-to-peer lenders are subject to consumer-protection, securities and banking rules, and usury laws. But, there is a gnawing feeling among state regulators; they wonder if investors understand the risks involved in these loans, whether borrowers understand they can be taken for a ride, and who will insure that proper credit quality obtains.
(Right now, the loan default rates are reasonable. Lending Club has a default rate of about 4%; Prosper is averaging a 5.8% default rate. Of course, if you invest $50 K spread around 200 loans, then you are pretty diversified and should not suffer from the failure of any one creditor.)
Oh, these firms (Prosper, Lending Club) make some of their money from the origination fee (related to the credit risk involved); those fees range from 1 to 5%. Some collect a small piece from the monthly repayments (although they claim they covers their costs). They also collect fees, if they are forced to collect from “deadbeats”, which is on the order of 1%.
An amazing idea. I have never done this. I love the options, though. Thank you
Carol Tomany recently posted..Yoplait and the cure?
It’s not too late, Carol. You can start your own company to provide this service!
This is a very cool way to borrow or lend money. I like the idea of splitting the risk among the lenders. I think that the rate of defaults is low enough and the risk to any one lender is low enough to encourage people to do both. I especially like the fact that it benefits many people both ways. If we don’t help each other, we are all going to fall.
Ann Mullen recently posted..The Senior Caregiver and the Sensitive Doctor: Tips to Make Them All So
Of course, the bigger the split, the more the money trickles back to the “aggregator” with more fees, Ann. So, there’s less to those who ponied up the money.
Very interesting. I’ve never heard of P2P but it seems like it could be a good option for many.
It certainly is a way for those “with” to make “more” on their money, Suerae.
Wow. Something that would never be possible without the internet. What is the average loan amount that is secured?
I would say the average loan seems to be about 15K- but that is a guess rendered by dividing the outstanding loans by the number of loans. But, it could be that it’s a bimodal or trimodal distribution, so the most common loans could be 5K, 15K, and 30K, Alessa.
The dreaded loan…
Caro Ness recently posted..Genghis Khan
If all loans are dreaded, then, yes, Caro.
But, this is among the alternatives- and a little cheaper than that obtained via credit card advance. And, a ton cheaper than those payday loans!
It is a very interesting idea. I would be a bit scared to do it, but it is probably because I am very risk-adverse. That said, I think that you could get better rates in the bank (if they accept to borrow money, that is).
MuMuGB recently posted..Teenage Mistakes
So, you would never borrow money, Muriel, or just not this way?
What if you needed it- and could not get a bank loan? It is a little cheaper than taking that credit card advance…
I am not pushing the concept, per se, but want to consider all the options.