USA Today: Alternative lending sites often have good deals
Excerpt:
Borrowing money from your peers has its perks. You might be able to secure lower rates than what financial institutions charge for unsecured loans. (That said, if you owned a home and could get a home-equity loan, you'd probably get a lower rate than you could get borrowing on peer-to-peer sites.)
This type of lending isn't for everyone in need of unsecured cash. Most peer-to-peer sites limit the amount you can borrow. And there are generally more borrowers than lenders online, so not every loan will be funded. In addition, those who are more comfortable tapping the generosity of family and friends have little need to seek out these sites.
"There's only so much capital out there," says Jean Garascia, an analyst at Javelin Strategy & Research. "The (online) community is basically calling the shots and figuring out who's going to get loans."
The main reasons why borrowers turn to peer-to-peer lenders? They want to find low interest rates and to avoid piling up credit card debt, according to a November survey conducted by Javelin.
Some peer-to-peer lenders are more exclusive than others. Virgin Money facilitates loans among family and friends, rather than strangers. Virgin says that avoiding eBay-style loans among strangers allows lenders on its site to feel more comfortable issuing large amounts, such as the down payment on a home.
Lending Club and Zopa offer loans only to those with minimum FICO credit scores of 640. (Scores range from 300 to 850, with 850 being the best.) Even with a good score, though, Lending Club will accept only borrowers with what it regards as manageable debt. The two companies say their policy reduces the risk of default for lenders.
Lending Club also tries to connect borrowers and lenders who have like-minded interests — those from the same school, say, or who work for the same company — to "increase accountability," says Renaud Laplanche, founder and chief executive of Lending Club.
Prosper is the most laissez faire of the peer lenders: It allows almost anyone to borrow and lend on its site, after it checks that person's credit and verifies his or her identity. At Prosper, borrowers with the worst credit scores could be stuck with rates as high as 30%, if they're funded at all. Consumers with great credit might be able to receive rates of 7%.
"We think it defeats the purpose if you have to know people" to borrow and lend money, says Chris Larsen, Prosper's CEO. "It's kind of like on eBay. If you can only sell products to family and friends, we think that doesn't lead to the best prices."
Zopa, a peer-to-peer lender that started in the U.K. and began operating in the USA this month, probably has the most unusual model: Borrowers with good credit can get a loan from one of six credit unions that partner with Zopa. And people looking to earn interest on their savings can buy one-year FDIC-insured certificates of deposit from the credit unions. The CDs pay rates of up to 5.1%.
Comment: Peer to Peer lending sites:
- Zopa.com
- Prosper.com
- Lendingclub.com
I have my own experience with Prosper.com. One of my borrowers (for $ 50) defaulted after 2 payments and now has filed for bankruptcy. This borrower had a "C" credit rating. For this loan, I've lost $ 48.00. I intend to expand with Prosper in a very limited way ($ 50 per month) and limit my future lending to "AA" and "A" only.
