I caught this post in the paper version of the Washington Post over the weekend and have been meaning to send out a blurb on it. Apparently, a new market of peer-to-peer lending has popped up , where banks are no longer a part of the lending proposition. Loans are made directly peer-to-peer. Whether this is a reaction to tight credit or some weird new innovation due to the Internet, I don’t know. Call me conservative, but it doesn’t sound like an attractive proposition for individual lenders.
Below is a snippet from the article.
Steve Lubs was looking to get rid of his $8,000 in credit card debt, but his high interest rate had him bogged down. He tried getting a loan through a bank to pay off the balance but couldn’t find one with an interest rate lower than 12 percent.
That’s when he turned to Prosper, one of several peer-to-peer lending networks that connect people who need a cash infusion with those who have money to lend. About 70 people have pitched in with $100 to $300, totaling the sum he needs to get out of debt, at a rate of 8 percent.
“When it comes to borrowing, it’s a bargain,” said Lubs, an engineer who lives near Columbia.
Rather than turning to the traditional sources of loans — banks, mortgage lenders, credit unions — many cash-strapped consumers are borrowing from friends, family members and even strangers and are getting favorable terms and rates. And people with money to spare see lending it to others as a better investment than socking it away in a low-yield savings account or playing the volatile stock market.
“Worthy borrowers used to have lots of options, but those have dried up,” said Chris Larsen, chief executive of Prosper, where about 780,000 users have exchanged $160 million since the lending network launched 2 1/2 years ago.
Getting a loan isn’t as easy as it once was, as interest rates have climbed and credit standards have tightened. At the same time, demand for loans is rising. High gas and food prices make it harder to save and pay off existing debt. Home-equity lines of credit are harder to come by, leaving many people short on the costs of home improvement and other expenses. Some people also find it difficult to use traditional lending to finance a car or a graduate degree.
As a result, several peer-to-peer lending networks have sprung up, with names like Zopa, Virgin Money and Lending Club. Some, such as GreenNote and Fynanz, offer loans exclusively for students.
But using such networks can be a gamble for both lenders and borrowers. Loans made through some networks are not insured by the Federal Deposit Insurance Corp. Some networks are affiliated with credit unions or banks, which are regulated by the federal government.
Lenders run the risk losing their investment if people don’t pay them back.
The networks supervise the loan agreements by checking credit histories. But if a borrower defaults on a loan, a lender’s only recourse is to report the borrower to collection agencies. And not all networks are licensed to make loans in all states.
For borrowers, replacing existing debt with a new loan could lead to deeper financial problems. Personal-finance advisers say borrowers could find themselves in a worse financial hole if they use the networks like just another credit card.
Borrowers must be creditworthy, and both borrowers and lenders must divulge private information such as bank accounts and driver’s license numbers to get started, raising privacy concerns among some observers.