Peer-to-Peer Lending

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Peer-to-Peer Lending

With bank loans harder to come by, some people who need to borrow money are turning to a fast-growing online industry:  peer-to-peer lending

Online companies, such as Lending Club, Prosper, and Loanio, are connecting people who need money with those who wish to lend it.  According to a report from Reuters,1 this seems to be a win-win proposition.

Through this so-called P2P arrangement, borrowers get the money that would otherwise be unavailable from banks, and they pay a lower interest rate than they would if they used either a bank loan or a credit card.  At the same time, individuals who have money to invest get a double-digit return that neither the stock market nor any bank instrument will deliver today.

For many businesspeople, lending this way has proved to be the only port in a financial storm.  In the past year, two San Francisco partners have invested almost a million dollars and received a return of more than 12 percent on the money they've lent so far.  Even some financial planners are advising their clients to invest their money in peer-to-peer lending sites, too. 

When Loanio began doing business last October, more than 1,000 people signed up within the first week.  Another site, Lending Club, has handled $20 million in loans in 18 months. 

Richard Branson's Virgin Group has entered the market with Virgin Money, which focuses on handling loans for lenders and borrowers who already know each other.  It also offers mortgages.  While the borrower is responsible for finding the person willing to lend the money, the loans are much more secure as a result of that connection. 

For example, the default rate at Prosper.com is 10.8 percent, and 4.4 percent of its payments are a month or more late.  At Virgin Money, the default rate is much lower — 5 percent for personal loans and 1 percent for mortgages.

According to the San Francisco Chronicle,2 one of the hottest areas for peer-to-peer lending is in the market for student loans.  Why?  Not only have tuition costs soared, but banks are simply not lending as much money as they once did.  According to The New York Times,3 lending capacity for private student loans has shrunk by 20 to 27 percent since last year, making up to $5 billion that students could borrow in 2007 unavailable today.

Lending sites like GreenNote and Fynanz cater mostly to students.  And Branson has started a student loan site called Student Payback...

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