Peer-to-Peer (P2P) lending is no longer an idea that was started yesterday, but rather last year. P2P's new maturity comes at a remarkable time when banks are lending less. I was skeptical when P2P companies initially announced their bold ideas. I didn't think the P2P companies were doing enough due diligence and I assumed individual lenders would pay the consequences.
Today I feel differently. P2P has earned a little respect. Roughly $100 million in P2P loans were issued in the U.S. last year and that number is expected to increase tenfold by 2010 according to Online Banking Report. With P2P loans, individuals looking for loans create a listing with information on how much they want to borrow, purpose, and how much interest they'd like to pay. Credit scores and history may be included in a borrower's profile. People with money browse for lending opportunities and place an ebay-like bid on listings they like. Borrowers pay a one-time free ranging from 1% to 3% of principle and lenders pay 0%-1% of their principle balance.
Peer-to-Peer loans are competitive with banks and in some cases even better. P2P's biggest drawback for small businesses is its tiny size: usually no more than $25,000. However, for many Start-ups, that's plenty! Also, considering that many banks refuse to lend to companies with less than a 2-year history, P2P is a valuable option in an environment of shrinking choices.
Here's a P2P primer from the Wall Street Journal:
Globefunder.com - Lenders specify what types of loans they want to make and the site, using decision-matching software, finds loans that meet their criteria. Borrowers choose from a range of recommended interest rates.
LendingClub.com - Approved borrowers post their loan description. Lenders can choose individual borrowers or use the "LendingMatch" technology to build a diversified portfolio of loans.
Prosper.com - Borrowers post listings that detail how much they want to borrow- up to $25,000, repayable over three years- what they're planning to use the money for, and how much they're willing to pay in interest. Prospective lenders bid on the loans and set the minimum rate they are willing to accept.
VirginMoneyUS.com - Family and friends use the site to set up loan-payment plans. The company handles the paperwork and services the loan.
Zopa.com - Lenders get lower returns that on other site, because Zopa puts the lenders' money in FDIC certificates of deposit, currently yielding 4.25%. Lenders can accept a lower CD return, with the difference going to help reduce a borrower's payment.