Peer-to-peer lending hits its stride
As the global credit squeeze leads banks to tighten their lending, a niche industry is emerging as the eBay of consumer loans: peer-to-peer lenders.
With peer-to-peer lending, individuals, some of them with little or no collateral, seek loans from ordinary people looking to lend. Lenders compete with each other to make loans, often resulting in lower rates for borrowers - averaging 10 percent to 16 percent - than are available on unsecured bank loans.
Typical loan amounts range from $8,000 to $20,000; on some sites, multiple lenders may fund a loan, each offering to lend $25 to $200 to a borrower.
The market for the loans is still relatively small but growing fast, according to Celent, a research firm. Celent projects that $5.8 billion in peer-to-peer loans will be made in the U.S. by 2010, an 800 percent leap from the amount this year.
Lenders on the sites usually decide whether to lend money to a particular borrower - and at what rate - based on the borrower's credit score and existing debt. Yet unlike with a bank or credit card loan, the decision is sometimes based on social factors, too: how compelling the borrower's reason is for a loan or whether he or she shares hobbies with the lender, says Christine Barry of Aite Group, a consulting firm.
"When you're dealing with a large financial institution, it may be difficult to tell your story and get people to understand," says Douglas Dolton, CEO of Zopa, one of the peer-to-peer lenders.
The more established players - such as Prosper and CircleLending, which sold a majority stake in the company and rebranded itself Virgin Money US this year - dominate the business. But more rivals are entering the industry at a time when even people with good credit are finding it harder and costlier to borrow from traditional sources.
In December, Zopa opened up shop in the U.S. Also this month, Lending Club, which began as a service for Facebook members, expanded nationwide.
"It seems that the credit crunch is accelerating our growth," says Renaud Laplanche, CEO of Lending Club.
Peer-to-peer sites profit not from a loan's interest rate but from fees they charge borrowers and lenders to make and service the loan. They also check borrowers' credit and contract with third parties to collect on bad loans.
Default rates are lower for peer-to-peer loans than for other consumer loans. Cory Moore became a lender on Prosper.com this year. To hedge against defaults, he spreads his risk by lending small sums to different borrowers. So far, he's made 170 loans, for $50 apiece.
"If one defaults, I've lost (money for) a dinner for two," says Moore, who says he's collected about $4,000 in interest from the loans. "Each loan is only $50, so I'm not worried."
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