In the past few years, a new paradigm for borrowing money emerged, where people with money to lend extend funds to borrowers directly. Called “peer to peer lending,” the model has begun to slowly mount a legitimate challenge to traditional lending channels.
We don’t need no stinking bankers
If a person wants a loan, there are only so many channels one can go through in order to secure it. The most common source would be a bank of some sort; other than that, one can try to borrow money from friends or family. One could hardly ask perfect strangers for a loan. But what if you could?
Enter peer to peer lending services, sometimes called P2P. The model is fairly simple; people with money to lend can review applications from people who want to borrow. If a person decides to lend, he or she sets terms like interest rates and so forth.
The model has been gaining steam. Some of the first peer to peer lending services, like Prosper and Lending Club, launched in 2007, according to Daily Finance. The total loan volume is expected to top $1 billion this year.
Great for borrowers and lenders alike
The most common peer to peer loans are usually personal loans. Lending Club, according to the Wall Street Journal, notes that the most common purpose for getting a loan among prospective borrowers is to pay off credit card debt. Prosper.com echoes the sentiment.
Lending Club structures loans to credit scores; those with a high credit score pay a lower rate. Those with excellent credit scores pay interest rates of about 10 percent. Investors who fund the loans earned an average 8 percent on their capital last year. Lending Club has been anointed a saint in the business press for its continuous growth. Prosper also has done well for itself, increased its loan volume by 178 percent last year, according to Daily Finance.
Peer to peer lending is starting to branch into other types of loans besides unsecured personal loans. For instance, according to the New York Times, a peer to peer lending service for student loans called Social Finance Inc., or “SoFi,” is launching this year after a trial run at Stanford. The company hopes to have raised $150 million in capital by the end of year. Interestingly enough, SoFi raises capital only from alumni, whose funds will only be lent to people attending their alma mater. SoFi is starting by offering loans to undergraduates and consolidation loans to recent alumni of Ivy League business schools.
There is also National Family Mortgage, according to MarketWatch. National Family Mortgage uses the peer to peer model for home improvement or refinance loans as well as conventional mortgages, at rates as low as 3.49 percent. The company recently passed $30 million in loan originations.