Peer to Peer
In 2005, there were $118 million of outstanding peer-to-peer loans. In
2006, there were $269 million, and, in 2007, a total of $647 million.
The projected amount for 2010 is $5.8 billion
The marketplace model of Person to Person Lending on the Internet
enables individual lenders to locate individual borrowers and
vice-versa. This model connects borrowers with lenders through an
auction-like process in which the lender willing to provide the lowest
interest rate "wins" the borrower's loan. The marketplace process may
include other intermediaries who package and resell the loans, but the
loans are ultimately sold to individuals or pools of individuals.
The "family and friend" model forgoes the auction-like process
entirely and concentrates on borrowers and lenders who already know one
another, as with two (or more) friends or business colleagues
formalizing a personal loan. Whereas the primary benefit of the
marketplace model is the "match making" aspect, the family and friend
model emphasizes online collaboration, loan formalization and servicing.
Traditionally, lending institutions have benefited from scale and diversification. By pooling the available money supply
and lending it out again, the impact of any one default is made trivial
in light of the timely payment of the vast majority of the notes
outstanding. The downside to the traditional model is that it has
introduced greater transaction overhead and removed community loyalty
from the equation.
Person to Person Lending allows individual participants to directly
control the allocation of their own capital, as opposed to the
traditional bank lending models which pool all funds together and
completely remove the individuals who actually own the money from the
decision-making process regarding who may borrow that money, for how
long they may borrow it, and under what rates and terms.
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