With the financial crisis drying up loans from traditional banks, would-be borrowers are have begun looking to alternative channels for financing. They have turned to the fast growing online industry of peer-to-peer lending, which connect people who need money with people who have it. Going through companies such as Lending Club, Prosper, and Loanio, borrowers can get the money they want at lower interest rates than banks or credit cards, while individuals lending money get higher rates of return than many traditional investments. With the stock market down, lenders are bragging about the double-digit returns peer-to-peer lending is bringing. The industry is expected to grow over 800 percent by 2010, with lending reaching $5.8 billion.
Loanio, which opened on Oct. 1st, is aiming at borrowers who have been turned away from other lending sites because of poor credit. In its first week over 1,000 people signed up to participate. The company encourages borrower to use friends and family as co-signers and verifies a borrower’s financial footing for a fee. With the economy sliding towards recession, they are here to stay.
Lending Club limits itself to borrowers with good credit histories and brags of a default rate of less than 2 percent. It now has started a secondary business where lenders can cash out of their loans early after getting regulatory approval from the Securities and Exchange Commission. The average return for their lenders is a hefty 13 percent. This has led to Lending Club doing $20 million in loans in 18 months.
Peer-to-peer lending companies generate profits by collecting a one-time 2 to 3 percent fee on funded loans from borrowers and assessing a 1 percent annual loan-servicing fee on lenders. People willing to lend money bid on loan request by offering the lowest interest rate they are willing to accept. Though borrowers are generally selected based on credit rating and current debt, there is also a social element of how compelling their story is. One of the areas expected to thrive is in student loans, with students being prime low income and little credit candidates.
While demand in this industry is growing, this model is not without its problems. Earlier this month Prosper stopped signing up new lenders while the Securities and Exchange Commission evaluates its regulatory filings, a process that could take up to six months. This is amongst a gradual decline in the amount of new lending and average interest rate were increasing. As the economy continues to worsen, lenders are becoming weary of tying up their money in deals that typically run three years. As the industry grows, questions will also have to be answered as to the industry’s regulation, with many having to get bank licenses.
However in a time where we have seen our first ever drop in GDP, this person to person lending process could prove to be a vital way of keeping our economy growing.
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2 comments:
As I said in class this peer to peer lending seems like a major step back. Considering that the credit scoreing system was designed to get rid of the emotional nuances from the lending system. While total regulation for this area I dont see; i do beleave that there should be limits on the amount that could be loaned because as the amount loaned is increased the proberility of it being paid back, in a timely manner, decreases.
P2P lending seems very impressive. It has very competitive interest rates which is attractive to both lender and borrower. Obviously it is a helping hand for people who get denied for credit due to the credit scoring system. There are numerous qualifications that have to be met when a person tries to get a loan via a traditional bank. And this system is good way to bypass those burdens. However, I was curious if people who borrow money using these P2P websites actually get their payments reported to the credit bureaus. If so, it will help them to get even competitive interest rates when they borrow money for the next time using these P2P websites. From the lenders point of view, it allows gives them more confident to lend money if he or she has a good payment history. But what if the borrower goes into default? Can he go to another P2P lending website and borrow money again? I think there should be a way to figure that out for other prospective lenders.
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