Social Networking helps Peer-to-peer lending loan $300+ million in 2 years

With a slumping economy, falling dollar and banks tightening up their lending practices, consumers are finding it harder and harder to get loans at decent rates, if at all. Financial planners are abuzz with the fact that people are quickly turning to family and friends for help with financial issues. Combining the growing need and technology a new solution is on the horizon for people in need. The social networking world of the Internet has slowly been providing a solution through sites that allow consumers to get loans from other people instead of banks or credit cards.

The numbers speak for themselves that the trend of lending to your neighbor, family members or even strangers is becoming a fast alternative to suffering in debt, fighting foreclosure or just trying to make ends meet. The largest person-to-person lending website, Virgin Money, has managed a total of over $200 million in loans. The next largest site, Prosper.com just made an announcement on November 27th, 2007 that they had hit the benchmark of $100 million in funded loans through their marketplace.

While these two companies are the biggest, they only scratch the surface on all of the new services offering peer-to-peer lending. Other services launching soon or already running are Lending Club, UK’s Zopa.com, GlobeFunder.com, Loanio and Community Lend. Big or small, these sites all generally operate the same way.

The organizations behind these websites provide a marketplace for borrowers and lenders to find the best combination weighing credit risks, identification and verification and way for people to tell their story. One leap these websites allow people to do when loaning money is to do it in a professional manner by proper documentation and loan issuing. After everything has been squared away in a documented loan with terms and conditions a repayment schedule and tax issues are covered and worked out with both parties. If it couldn’t get any more streamlined than this, you can also setup ACH payments directly from borrowers bank accounts. The cost for this is a percentage fee of up to 1% of the loan for the lender and the borrower can pay anywhere form .75% - 2% dependent upon their credit rating.

According to a research firm, Online Banking Report, the future looks bright for person-to-person lending. By 2010 the person-to-person lending market is expected to jump to $1 billion in total funding. By 2017, the market is expected to catapult to $9 billion dollars in total funding. If the trends develop as predicted these peer-to-peer lending organizations could rival some lending institutions.

Even with strong growth prospects in mind, the loans do have a funding limit on most sites currently. As of now, Prosper.com and Lending club both put funding caps on their loans at $25,000. Virgin Money operates a little differently by not putting limits on loans, with the CEO Asheesh Advani stating their personal loans average $20,000 and first mortgages average about $250,000.

Virgin Money USA was formerly known as CircleLending. As the strength of the industry became obvious, British billionaire Richard Branson purchased a majority stake of CircleLending and spun it into another Virgin subsidiary now called Virgina Money USA. Virgin demographic is tightly focused on family and friends lending to each other while providing the formalized loans and documents in the process.

Other sites like Prosper.com encourage friends and family to lend to each other but they also open their market to strangers with stories and in need of help. Prosper boasts 480,000 members in their network. The functionality behind peer-to-peer lending programs are generally the same. A good analogy is the eBay bidding market where average consumers can list products for sale and have others bid on them. The lending markets work the same way by allowing a borrower to post their loan, description and any other information and allow lenders to bid on the loan. The loan listing allows the borrower to state the maximum interest rate they are willing to pay for any loan up to $25,000. Once the loan is up for bid, as many hundreds of people can actually lend to the final loan amount.

Loan increments are usually set at $50 and helps lenders spread their risk. Someone in a tight crunch with a credit card that is facing over-the-limit fees, late fees and more could get a loan to consolidate their credit card debt and find it funded by 50 - 100 lenders. The process is even simpler once funding has been completed. Prosper.com and other peer-to-peer lending institutions act as the middle-man and complete all loan administration throughout the life of the loan. Things that are taken care of by the institutions are things like loan repayment, collections for the life of the loan and reporting to the credit bureaus. After 30 days go by without payment the loans are assigned to a collection agency.

With all of the talk about growth, lending amounts and success it makes you wonder about the dirty side of the business. Defaults and non-payment. The CEO of Prosper.com has publicly stated that Prosper’s default rate hovers around 2.7 percent. A Deutsche Bank report published in July of 2007 states Prosper’s default rate at 5 percent when looking at 6 months of activity. Late payments run at about 10 percent of all the loans in Prosper’s funding history.

With the risk of defaults and late payments comes the reward for lenders. Lenders can earn rates anywhere from 7% - 18% on the money they loan. Many users of the social lending websites boast better returns on their investment than the typical places people invest for their future or retirement.

There is a strong social trend that is driving the success of these peer-to-peer lending websites. With news constantly coming out about Facebook and MySpace and how these sites are changing the world, their effect is now shaking up the peer-to-peer lending idea. Another company that started in peer-to-peer lending in May 2007 has grabbed onto the power of FaceBook and is driving their business growth through a Facebook App. The site uses the proprietary Facebook application platform to connect lenders with borrowers, due in part to Facebook’s Viral nature and the fact that friends trust lending to other friends. Whether Facebook users need to consolidate credit card debt, pay for vacations or wedding dresses they can now beg friends in the social network.
Have you used peer-to-peer lending yet? Do you think this is a future solution to America’s credit crunch or just another way for American’s to get in debt? We’d like to hear from you at our submission form. If you want to speak your mind or you are involved in Peer-to-Peer Lending and want to speak your mind we want to hear from you. Tell us your story and thoughts at our submission form.