Borrowers hurt by the credit squeeze and investors looking to boost their returns are increasingly turning to the same place: peer-to-peer lending. The loans can be quicker than going through a bank — and offer rates of return that can beat those of government bonds.
Companies such as Lending Club and Prosper Marketplace match individuals who want to borrow money with those who have money to lend. The process happens online, without a trip to a traditional bank.
Quick And Personal
When social worker Jennifer Mamary of Seattle needed a car for a new job, she bypassed the banks and turned to Lending Club's Web site to find people who would lend her money.
"In order to get the loan, you have to put together a profile and talk about your financial history, and why you want the loan," Mamary said. "You have a chance to tell your story, even post a picture of yourself."
Applicants then wait to hear what the answer will be.
"It was a really easy process," she said. "In terms of quickness, I think it came through in about two weeks."
Mamary used the $5,500 loan to buy a modest used car. The interest rate on the three-year loan was competitive — perhaps even better than what she would have received at a traditional bank.
Mamary's approach to getting a loan may soon become more widespread.
Conventional lenders' extreme caution has tightened up the flow of money and credit, while investors looking for a place to put their money outside of the volatile stock market or low-interest Treasury bills are showing more interest in peer-to-peer lending.
"The combination of those two factors makes it the perfect time for social lending," said Renaud Laplanche, founder and CEO of Lending Club.
Laplanche cites a single 10-day period in October, in which he says 1,200 new investors signed up to lend money.
"That's about three times the rate we were experiencing back in April," Laplanche said.
Since 2006, about $200 million has been lent through peer-to-peer lending. Of course, that's just a tiny drop in the overall lending bucket.
Most peer lending so far has been facilitated by Prosper, which is currently in an SEC-mandated quiet period. Lending Club is much smaller, but Laplanche says his company is poised for growth — it just received SEC approval to issue notes for $600 million in loans.
Prosper and Lending Club make their money through origination and service fees.
The idea of individuals lending to one another is very old.
And it has changed over time. David Schehr of Gartner Research suggests that modern institutional lending began with the community-oriented savings-and-loans.
"Then you went through the kind of commercialization, demutualization, and then you had small local banks owned by an individual," Schehr said. "And now you have much larger banks owned by corporate entities or transnational entities — and now we come full circle around to the other side."
A Growing Supply Of Lenders
Jim Bruene, founder and editor of the Online Banking Report, calls peer to peer "a good niche" — one he thinks will grow.
People with stable, well-paying jobs and stellar credit histories probably won't need peer-to-peer loans, Bruene says. But there are plenty of people who fall through the credit-approval cracks.
"It's people who just changed jobs, or they just got a graduate degree, or they just started something new," Bruene said. "This alternative gives them a way to tell their story, talk about their budget and maybe come out with a well-priced loan that lets them get started on something."
As for the people lending the money, they can earn returns of about 7 percent to 12 percent, or more. And they can pick and choose who they want to lend money to.
Often, the lenders send a small amount to many different borrowers, to minimize the risk of nonpayment by a single borrower.
Typically, peer-to-peer loans are small — less than $10,000 — and are unsecured.
That could change, however, as online lenders consider expanding their offerings to include things such as home mortgages.