Brother Can You Spare a Dime? The Emergence of Peer-to-Peer Lending

Originally posted on the Tree.com Money and Finance Channel

When we need to borrow money, we go to the bank, family, or a friend. However, there’s a new trend in lending that’s emerging lending.” These are transactions that occur between people without the involvement of a traditional financial institution.  There are many sites now helping facilitate these types of financial transactions.

With peer-to-peer lending sites, both the borrower and the lender post their terms, with each trying to get the best deal they can find. Borrowers and lenders choose their own terms and interest rates. These sites not only broker transactions between strangers, but terms can be established between friends and family members as well. Common advantages cited include low and fixed rates, no hidden fees, simple processes, and quick turnarounds. Investors can earn 10% in annualized returns on peer-to-peer loans. The sites generally charge a 1% service fee subtracted from loan interest.

LendingClub promises investors better returns, and borrowers better rates. Investors at LendingClub have earned average returns of 9.65% as of April 2011, according to the site. Borrowers are told they can borrow from 6.78% APR. LendingClub statistics list over $250 million in loans since 2007, with over $20 million paid to investors.

Kiva seems to offer a more simple approach. Empower people around the world with as little as $25. Kiva is a non-profit organization striving to connect people through lending to help alleviate poverty. Since 2005 Kiva has worked with over 571,000 lenders, $250 million in loans, with a 98% repayment rate.

Zopa is UK based, and Zopa is run by a team drawing experience from industries including Financial Services, and backed by the firms who also invested in companies such as eBay, Betfair and Lovefilm. Zopa has been around since 2005, and voted “Best Personal Loan Provider for Service” at the 2010 Moneywise awards.

GreenNote bills itself as the “higher education donor network.” GreenNote helps students achieve their higher education dreams by using social networks without utilizing traditional lending methods. Students connect with their social network--friends, family, friends of family, community leaders and others - to ask for financial support.

Prosper works on an auction system where borrowers post a listing and wait for bids. If their bid is met in the time frame, they get their loan. If not, the loan goes back in the bidding pool.

This new trend in peer to peer lending tells us primarily that there are alternatives to the traditional banking system. The interest rates on loans through these sites are not as competitive as bank rates, but they are still lower than credit card rates.

If you’re thinking of trying to get a loan using one of these sites, as always, do your research. The models are similar, but you still should find the site that best fits your needs. Don’t be greedy. Be realistic in what you’re asking for, or what you’re willing to help fund. Ask for help if you need it. Prosper.com has an online community available for discussion.

Most experts advise that if you choose to invest in these sites, diversify to lessen your risk. Make small investments, and spread your money out. Remember that you’re relying on the site to gather and provide accurate information on the borrowers and to contact them if there’s an issue. This follow through doesn’t always happen.

Borrowers should be clear as to what they need. Remember that you’re potentially applying for a high risk loan outside of banks and other investors. High interest can equate to high late payments. Also, make sure you know what you’re getting into. Research the site, and read the fine print.

Many of us are fed up with the banks and credit cards. Perhaps next time you’re looking for a loan, you should consider online peer to peer lending.