Gossip Corner: Peer To Peer Lending

Prosper “basically allows me to be the bank, which I really like,” said a Prosper lender who goes by the user name of Technologyguy and authors the site www.lazymanandmoney.com.

The emergence of the peer-to-peer lending market is a relatively new phenomenon, but over the course of only a few years, the financial steam engine has originated hundreds of billions of dollars in loans and connected millions of private borrowers and lenders.

All loans are made by WebBank, a Utah-chartered Industrial Bank and sold to winning bidders registered as lenders with Prosper.

Person-to-person lending or peer-to-peer lending or Social Lending is, in its broadest sense, the name given to a certain breed of financial transaction which occurs directly between individuals without the intermediation/participation of a traditional financial institution.

I pay off my entire credit card balance every month.

Loans and returns on loans are not FDIC-insured and have no Prosper guarantee.

Prosper.com, the first major person-to-person lending service in the U.S., intends to change all that by connecting small-time lenders directly with borrowers.

Peer to peer lending, it’s a brave new world.

Peer to Peer Lending attempts to correct this inefficiency and create a “virtuous cycle” which would allow those who have funds to lend to garner a better return, while, at the same time, providing a more favorable interest rate to those who need to borrow.

Although Peer to peer lending is relatively new to the modern lending industry it is an old concept dating back centuries.

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.

Borrowers in need of money post their specs $3,000 to consolidate credit card debt or $9,000 for a piece of equipment to expand a small company and lenders bid for the business.

Lenders through Prosper can choose to bid on financing an entire loan request or to take a piece of the debt thus spreading the risk of an individual loan among a number of lenders.

On Prosper, the process begins when a borrower posts a loan application that includes a requested dollar amount, maximum interest rate and other credit and personal information.

On this blog I’ve largely neglected Zopa while writing much more about Prosper, Lending Club, Fynanz and Loanio.

I have never considered the possibility I might be denied for a loan yet it happened today.

It is common knowledge that banks make huge profits on the margin between the interest rates they charge borrowers and the rates they offer to savings account holders.

Peer-to-peer lending, also referred to as social lending, person-to-person lending, microfinance and microloans, is a nontraditional form of lending involving unsecured loans between individuals.

Lending through a peer to peer lending network is also easier than working with a typical financial institution.

Except at friends and family sites, where the lender has a vested interest in the success of the borrower, the lenders are focused on obtaining a reasonable return on their investment.

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.

NuWire reviewed the following four peer-to-peer lending platforms for distinctive qualities such as respective levels of risk on investment, potential for return, strictness of borrower criteria and any unique features offered exclusively through these companies.

Newsweek Magazine’s Tip Sheet section last week featured two Web sites that have nothing to do with real estate or mortgage financing but may illustrate the future of the mortgage lending game.

Through the platform’s auction-style format, borrowers post loan applications with requested loan terms and relevant credit and personal information, and lending members view and bid on loans until the loan is fully funded or until the auction deadline has elapsed.

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 most significant downside, however, is that lenders face a significant risk of loss on their investment, as repayment of loans is not guaranteed.

It’s not just about lending money and earning a return on your investment, but knowing that you are making a difference in people’s lives.

Similar types of mutualized credit systems are already quite often successfully employed by microfinance institutions in developing nations.

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.

Prior to the launch, borrowers with poor or no credit scores have been turned away from, or have had little luck, with other p2p lending platforms.