Unless you carry gold-encrusted financial credentials, many banks and credit card companies no longer want you as a credit customer. But that’s okay, since many credit-worthy (as well as credit-challenged) customers are turning to online “peer-to-peer” (P2P, or person-to-person) loan sources, and are proving they no longer need a bank.
Web-based P2P lending is booming. Consider it the democratization of the lending industry — average Americans making loans to each other in a controlled marketplace made possible by the evolution of several websites created to facilitate P2P lending.
One such site, Prosper.com, has a membership base of over a million individuals, including both those who lend and those who borrow, and has funded over $230 million in loans. The system works like an auction where credit-worthy borrowers post a loan request or “listing,” and would-be lenders bid for the business. So if you have a good-looking credit history, want to borrow $10,000 and are willing to pay, say, 10 percent interest, you could end up with a loan at a lower rate as lenders compete for your business.
As a borrower, you set the amount of want and the rate you want to pay and wait for lenders to step up. And it works. Much like eBay spawned an army of small e-Bay businesses, P2P sites are attracting small investors who see it as a way to earn a higher return on their money.
P2P sites have created a turnkey structure to facilitate the loan process. In addition to matching peer borrowers with peer lenders, the process provides all of the loan documents and payment systems to make the loan happen.
In addition to criteria commonly used by banks, such as credit scores and histories, Prosper lenders, for example, can consider borrowers’ personal stories, endorsements from friends and group affiliations. Once the auction ends, Prosper takes the bids with the lowest rates and combines them to facilitate the funding of one simple loan to the borrower, and then issues what are called “Notes” to all the winning bidders. Prosper handles all on-going loan administration tasks including loan repayment and collections on behalf of the matched borrowers and investors. Prosper members can also trade Notes with other members on the Folio Investing Note Trader platform.
Beware of “me-to” sites that attempt to jump on the P2P bandwagon but might not have the member base or resources to stay in business. A site called Pertuity Direct, for example, came and went quickly as its investors pulled the plug. Because P2P lending sites have to meet state government lending rules (as well as federal SEC requirements), they aren’t operating in all 50 states. Check their web sites for a list of areas they operate.
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Filed Under: BizFinance
About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.