Borrowing From P2P Lending

Ever since the mid-2000s credit crisis, peer-to-peer lending services have been drawing a lot of interest. If you are interested in these alternative sources of funds, this article explains their many benefits and covers sites where you can make a strong case for the funding you need.

A Brief Story

Settling credit-card debts took its toll on Liz Rizzo, a 36-year-old director working in Los Angeles. But after securing a loan via a certain peer-to-peer lending site, the ambitious professional planned to repay her debt within four years.

“It really turned things around,” is how she described the $4,800 loan she had secured through the Prosper lending service (prosper.com). Strangers who were intent on making profits from the interest had extended her the funds.

Her loan featured an interest rate of 13%, which was an improvement over the 21.99% rate of her credit card. Ever since she secured the funds in May of 2006, her credit profile had continually improved, which enabled her to refinance more of her debt burden at 9.99% via Zopa (zopa.com), a similar online lending service.

Peer-to-peer lending services have a key advantage in that they eliminate the role of conventional banks in lending. This helps to reduce overhead costs, which leads to better rates for both lenders and borrowers.

What you will need to know to participate in peer-to-peer lending.

The online approach brings a sense of community to the process. Rather than a bank making decisions on who gets funded, personal lenders get to decide. They would check not just for expected returns, but also borrowers’ motivations for getting such funding as well.

Multiple lenders often put up funds for particular cases. According to industry insiders, a key reason why consumers apply for such loans is to repay high-interest debt on their credit cards.

A long rising trend

This idea of lending to peers is hardly new. Friends and family have always lent among themselves without any involvement by financial institutions, as Pleasanton, CA research firm Javelin Strategy & Research noted. The advance of online communities has enabled people to arrange such lending through a more formal process.

Lenders and borrowers continue to search for deals online, as interest in such schemes continues to rise, according to Asheesh Advani, CEO of the Virgin Money peer-to-peer lending site.

The hardships that consumers had faced during the mid-2000s credit crunch were also related to accelerated rates of interest, as Prosper CEO Chris Larsen noted. He believes that people look for options when they cannot source loans from traditional banking institutions.

Outstanding peer-to-peer loan levels in the United States had reached $118 million in 2005 and then $269 million the following year, as reported by Celent, an advisory and research firm in Boston that assists financial institutions in developing technology and business strategies. By 2007, outstanding peer-to-peer loans had reached $647 million.

Side-stepping banks

If you are interested in borrowing money through a peer-to-peer lending service, your first step would be to pick the most suitable site.

“You must understand the models being utilised for peer-to-peer lending. Each has its differences and nuances,” noted Mark Meyer, a director of Filene Research Institute, which is a research firm in the credit union industry.

At the Lending Club (lendingclub.com), only applicants with FICO scores of no less than 640 can find loans. Their  debt-to-earnings ratio may not exceed 30% as well. Members could associate with groups that lenders can filter for, using criteria such as occupation, school, and neighbourhood. A social media component is also available that allows Facebook users to lend among friends, or search for borrowers who participate in similar groups of networks.

In a different approach, Prosper lets the market decide on which borrowers receive funding, for any borrower can present a pitch no matter his credit score. Members could also join groups at its site, connecting them with other members who share similarities such as profession or location.

Zopa is a lending site affiliated with various credit unions throughout the country. A minimum 640 FICO score is required for borrowers and they would have to become credit union members. Various lenders invest in the available certificates of deposit found on its site by choosing borrowers they are willing to assist with funding. The more a borrower sells his story to potential lenders, the more funds he could receive.

At Virgin Money (virginmoney.com), lenders and borrowers get to know one another from the start. The service facilitates loans among family members and friends. Although returns are a big draw, it can be just as important for investors to help finance people they know. Such lending is more likely to get restructured when borrowers fail to complete payments.

In making a case for getting a loan, follow these guidelines:

Be realistic about the rates you request. It is vital to realise from the start your real appeal as a borrower and thereby set realistic expectations, as noted by Jean M. Garascia, an associate analyst from Javelin who wrote its report. In the example of Rizzo, the first time she asked for rates on Prosper did not pan out as she set them too low for lenders to accept the risks.

Give your story. One draw of peer-to-peer lending is that lenders come to know the borrowers. In certain schemes, you would explain why the funds are needed while giving some details about yourself, which can help investors connect to your story and perhaps fund the loan.

It can take time before funding comes through, if at all. Unless you are looking to borrow from acquaintances, the process may take some time. “Loan demand remains much higher than the available pool of capital,” Garascia noted. “You are at the mercy of this community. You could be funded within a day, for some people receive funding rather quickly, but other times it can take more time than expected.”

Go over all terms and conditions. Interest rates are important, but you should always check the lengths of loan terms. Unlike credit card loans, these must be repaid within specified periods. As with all lending, the penalties of defaulting on peer-to-peer loans are similar in that your credit history usually worsens as a result.