Peer-To-Peer Lending Making Market Waves
Aug 28th, 2013 @ 11:50 AM by Amber Nelson
Traditional banks are getting some serious competition these days from very non-traditional source. LendingClub Corp. and Prosper Inc., two of the largest peer-to-peer lending companies today are growing rapidly as American consumers look to become small-time bankers themselves.
Both companies offer an online marketplace where borrowers and investors can connect with the click of a button. After a credit check, borrowers ask for money for a specific purpose (up to $35,000) and time frame (between three and five years.) Anyone with a little money to contribute can join on as investor. Sometimes individuals pledge as little as $25 a piece. When there are enough investors to make the entire loan, the borrower receives the funds and starts the repayment process.
Renaud Laplanche, founder and chief executive officer of LendingClub says the online platform and minimal overhead make peer-to-peer lending a truly viable option. “What we’ve done is radically transform the way consumer lending operates,” Laplanche said in a speech. “The savings can be passed on to more borrowers in terms of lower interest rates and investors in terms of attractive returns.”
These loans can be for anything from credit card consolidation to home improvement to student loans. And they are doing very well by-and-large. The default rate on loans at Prosper fell to an annual rate of 5.8 percent in July, down from 12.3 percent in 2010. Lending Club’s combined default and charge-off rate dropped to 2.5 percent at the end of this year’s first quarter compared with 6.7 percent at the end of 2009.
And the loans just keep coming. In 2012, LendingClub made $718 million online loans. Prosper made $153 million, but was embroiled in a class action lawsuit. Now that its settled, Prosper expects to make $500 million in loans next year. And it is estimated that by 2106, peer-to-peer lenders industry-wide will be averaging $20 billion in loans a year. With contributors earning as much as 9.5 percent on their investments, it’s easy to see how these predictions could be right on track.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.