Peer-to-Peer Lending Here to Stay?

Tuesday, June 10th, 2008

Every time I turn around it seems like a new peer-to-peer lending service is being launched. The latest, Fynanz, launched in March and is trying to bring the peer-to-peer structure to student loans. If you are looking to get into peer-to-peer loans (or P2P for short), either as a borrower or lender, you have many options to choose from; Prosper, Zopa, Lending Club, and Virgin Money are just the well-known ones that have recently launched. But with all the these sites launching so close together and all with basically the same idea, will the market be big enough for them all?

As the credit crisis forces banks to tighten their lending practices, peer-to-peer lending has stepped in to fill the void in the loan industry. P2P lets people bypass banks and borrow directly from a real person. It works for lenders because the security of being guaranteed and insured against loss is still there like a traditional loan backed by the government. The upside for borrowers is that lenders compete to give them better rates.

Zopa and Prosper seem to be best equipped to last the longest and emerge as the front runners in this yet developing industry. Lending Club, with its unique marketing strategy of first launching as a Facebook app, is targeting a slightly different audience than the rest and this strategy will help them spread their name faster than the others.

Fynanz is interesting because they facilitate student loans. But, whoever reads this blog knows that private loans always have higher interest rates than federal loans. Private loans should be avoided unless there is no other way get a federal loan apart from grants or scholarships. I don’t see Fynanz lasting as long as the others.

Billionaire Richard Branson’s Virgin USA investment firm late last year bought a majority of shares in another peer-to-peer loan company called Circle Lending. Now renamed Virgin Money USA, their angle is to help manage loans between family and friends who would like to avoid misunderstandings and repayment disputes.

Peer-to-peer sites profit from fees they charge borrowers and lenders to make and service the loan, not from a loan’s interest rate like you may think. They also check the borrower’s credit. Some even contact third parties to collect on bad loans.

But who does peer-to-peer lending really benefit? Well, since default rates are lower for peer-to-peer loans than for other consumer loans, borrowers gain from having that lower rate (apart from student loans, whose counterparts are federal loans which will always have lower rates). And lenders gain a good investment that has a low default rate.

But what happens when the credit crisis is no more and the credit/lending industry bounces back? Ouch. Maybe a few of these sites may want to take out a loan themselves…

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