How to Take Advantage of Peer-to-Peer Lending
While the economy may be “recovering”, money isn’t exactly flowing from lenders to those who need the cash. Fists may not be tightly clinched, but the palm isn’t exactly stretched out beckoning either. And, because of lessons learned from loose lending folks with the goodies are looking a lot longer and tougher and those who come knocking for money.
Whether you’re a small business owner, or the average Joe or Jane on the money hunt, right now you could be feeling a discouraged with traditional lenders. Well, maybe it’s time for a Plan B, and increasingly for some, that means peer-to-peer lending.
Here’s what you need to know.
A growing trend
Peer-to-peer lending, which can also be called social lending, is all done online. There are several sites where you can find and lend money such as www.Prosper.com, www.Kiva.org, www.VirginMoney.com, and www.LendingClub.com. There are also some niche areas gaining momentum like www.GreenNote.com and www.People2Capital.com, which focus on P2P loans for students.
Peer-to-peer sites have been around a few years, but with the economy, they have really off in the last year or two. For example, Lending Club’s growth has been spectacular over the last 12 months, says Renaud Laplanche, founder and CEO. “Monthly loan volume has increased from $2.15 million last February to $8.7 million in March this year.”
What’s in it for you?
What are the chief advantages of borrowing this way? “The advantages really depend on the P2P lender. But in general, most people get a better interest rate,” says Beverly Blair Harzog, co-author of The Complete Idiot’s Guide to Person-to-Person Lending and a spokesperson for www.CardRatings.com.
According to Laplanche, interest rates average below 12 percent for unsecured credit, and there are higher returns for investors (9.64 percent net annualized return on average since 2007). These rates are possible by cutting down the high costs and inefficiency of the large banks, he explains. “Banks pay 2 percent on CDs and charge 14.5 percent on credit cards; we cut down that ‘spread’ and pass on the savings to the consumers,” he adds.
What to keep in mind
It’s essential that you research the sites because they are all different. For instance, says Harzog, the minimum credit score for a loan on Lending Club is 660. On Prosper, it’s 640. Know too, however, that if you have a credit score below 640 you might have problems obtaining a P2P loan, warns Harzog. “One trend I’ve noticed is that the bar for entry for borrowers is higher than it was a year or two ago,” she adds.
While researching sites, read the FAQs page and the websites’ blogs. If there is a forum, check it out. And don’t hesitate to email the sites and ask questions. “Basically, you must educate yourself to know if this is a good option for you,” says Harzog.
She adds, “There have been a lot of sites that didn’t make it. I’d avoid startups until they have a track record and can prove they have a good business model.”
For lenders, it’s critical that you understand that P2P lending is a risk. “Your money is not FDIC-insured and there’s always a chance that the borrower will default. For borrowers, it’s important to remember that this is a legal agreement to pay back the loan. If you default, the websites will report it to the credit bureaus,” says Harzog.
As always, when shopping, be a savvy buyer, check out what you’re getting into before jumping in. Peer-to-peer lending can be a viable option. Says Harzog, “For those who can’t get approved for a loan through a bank, a P2P loan can be a lifesaver.”
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