Can You Spare $10 000?

March 24, 2008

Peer-to-peer loans have been making bankers into average people according to Jeninne Lee-St. John of Times Magazine. Because of the “slumping economy”, the banking system has gone into panic mode forcing people looking for loans to turn to the internet in order to ask for help from friends and in most cases, a stranger. Even people with the best credit ratings are unable to get a good interest rate… Not only is P2P for sites such as Limewire and Facebook, you can also add online loans to that list. 

This new peer-to-peer (P2P) loan industry helps any regular Joe exchange cash with the help of an “online facilitator”. In 2007, it had a $650 million dollar debt. Prosper was the first “matchmaker” which began in 2006. To date it has 600,000 users. The way this site works is “borrowers post a request, and lenders bid on how much and at what interest rate they want to give. Several – or several dozen- people fund the loan at a rate agreeable to all. The intermediary runs a credit check, calculates return and takes a fee.” So far, the company’s default rate is less than .5%!! According to Times Magazine, members are motivated to pay back or lend to an actual person rather than a big bank. A great example is Marilyn Honolulu. Mrs. Honolulu has lent a total of $30,000 to more than 100 members, most members she has never met. “I measure my returns in not just the dollar amount, but the fulfillment I get from helping people.” She makes 6% to 7% on each loan. 

How It Works From Times

1 Seeking a Cheaper Loan – The Borrowers

Borrowers need credit scores of at least 640 of 850 maximum and a debt-to-income ratio of 30% or less. For example: Even with credit scores in the 700, people aren’t able to get an interest rate below 15%.

2 Making the Connection – The Online Middleman

The average loan is $9500, funded by 22 to 25 people. For example: Lending Club, which launched May of 2007, relies on fairly strict rules and works with people in affiliated groups, matching up, say, travel agents or MIT alums with peers.

3Looking for a Higher Yield – The Lender

Lenders list the total amount they’d like to loan and the risk level they can stand. They can select individual borrowers who meet their criteria, or the site’s Lending Match program will generate a portfolio. The mean 12.32% interest rate beats the current 3% average return on a CD. For example: Bernadette Lui has $3125 spread among 13 three-year loans. She earns 14.6% and is considering reinvesting her returns with new borrowers. 

I guess this is something that’s worth a try if the bank just doesn’t like you. It sounds fairly promising and a great way for people to get some short term financial help.

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4 Responses to “Can You Spare $10 000?”

  1. Tasia Says:

    I don’t think that financial institutions aren’t granting loans because they “just don’t like” their customers. The sub-prime mortgage fiasco in the US counts for the majority of FIs hestitation to grant loans, because they have to write off so many bad debts for granting loans to people who couldn’t afford them.

    As for the whole granting loans to people you don’t know, this sounds like scary concept. It sounds like something out of a mob movie, only 2.0 style.

  2. jblaquiere Says:

    I think this is crazy. And not in a bad way. Being able to take out a loan from an actual person via the web may be something big in the future.

    Of course there could be MAJOR downsides for the lendor, but this would provide a way to take out a loan with the flexibility to arrange different payment schedules, or even payment with assets if need be.

  3. romizuddin Says:

    Recently http://www.ioucentral.ca/ has launched their P2P lending product in Canada.

    Check this out:

  4. wattsy Says:

    I think that is a very neat concept of taking loans out through peer to peer loans. I like the concept of the lender being able to charge what interest rates they want. It seems like a good way to make money if you have money to lend.


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