P2P lending is money with soul

Person to Person or Social lending has been around for years. Most if not all of us borrowed some money from relatives, friends and friends of relatives and friends. For many this type of financial arrangement caused relationships disasters like in a famous phrase "Wanna lose a friend? Then lend him some money". But even knowing that people continue to borrow because life is erratic and urgent while banks are predictable and unhurried.

With the recent boom of online communities it was just natural for people to turn to the internet to satisfy their various needs including financial ones through social networking. And with the banks' high interest rates and unrelenting credit rating policies, it was simply inevitable for some alternative to arise.

There are a number of social lending networks existing in the Web. All of them have a rather recent history with some of them claiming to be the pioneers of the re-emerged form of financial exchange called social or person to person lending.

Social or P2P lending concept

The concept of person to person lending is to bring a person in need of money and a person who has the money together. It is basically a mixture of matching, auction and payment services. Most of companies facilitating this process rely on the following scheme:

• Borrowers submit an application for a loan/create a listing
• Lenders place bids
• Money are deposited into the borrower's account
• Monthly loan repayments are automatically withdrawn from the borrowers account and placed into the lender's account

Here are some illustrations from P2P lending networks:

http://www.lendingclub.com/

http://www.virginmoneyus.com/

http://www.zopa.com/

http://www.prosper.com/

All of the networks, communities or clubs are composed of some common building blocks; they are also regulated by set of rules and laws. Let's look into some of the key elements of P2P lending:

Borrowers

P2P borrowers usually look for loans to finance purchases, weddings or travel, repay high interest rate balances or other outstanding debt. Not every borrower qualifies for a traditional loan or has time to wait to be approved or denied by a bank. Not every bank is ready to offer attractive interest rates and clear repayment terms.

The other factor that affects social borrowers is that a vast majority of them are devoted internet users and prefer to conduct most of their personal business in an on-line format. By joining P2P lending network borrowers get:

• a better possibility that their loan request will be funded
• flexibility of personally choosing lenders and interest rates
• fixed monthly payments, no hidden charges or prepayment penalties
• no paperwork hassle - convenience of on-line application
• privacy - share as little or as much information

Lenders

• Prescreened borrowers - minimized risks of loosing your investment
• Lend as little or as much money as you choose (up to the state limit)
• Choose the interest rate based on the loan you want to make
• Feeling that you help someone while making money for yourself

Facilitators and their products

A number of P2P lending companies emerged over the several years. Lendingclub.com, Zopa.com, Virginmoneyus.com and Prosper.com are the good examples of a social lending scheme. Some companies operate on a national level, some went international. For example, Zopa.com has expanded its services to 3 countries such as Italy, the USA and the UK; it is also currently working on starting up in Japan. In addition to its recent US launch Virginmoneyus.com's loan service is also present in Australia, and by affiliation in the UK. Prosper.com and Lendingclub.com are available to US residents over the age of 18. Social or P2P networks/communities/clubs are not banks but simply loan facilitators. Here is what they have to offer:

• Allow borrowers and lenders meet
• Document the loan
• Transfer loan amount to the borrower account
• Set up a loan repayment schedule
• Withdraw monthly payments from the borrower's account for deposit into the lender's account
• No hidden charges; low loan closing fees (usually 1-3%) for the borrower and 0-1% annual loan servicing fees for the lender

The loans offered are strictly:

• Personal - no other programs or assistance involved to secure the loan
• Unsecured -no collateral needed to guarantee the repayment of the loan
• Closed-end - with the defined payoff period (3 to 5 years - varies by company)

Some of the companies like Zopa.com offer additional financial product such as a Certificate of Deposit (CD) account which allows lenders to earn interest on their deposits and obligates them to help lower monthly payments of at least one borrower. The CDs are fully insured and backed up by Credit Unions. That's a give-and-take approach that created a very humane aura around Zopa.com.

All the loan facilitating companies claim to offer qualified borrowers lower interest rates on a fixed term unsecured loan than any banks. Here are some examples of the published rates for the borrowers:

	A1 Loan	7.88%
	More Card	10.99%
	Platinum	12.40%
	Platinum MasterCard®	13.24%

Source: creditcards.com, good credit (2/22/08)

The loans are usually available to borrowers whose FICO credit score is above 630. The higher the score the lower is the interest rate on the loan.

Here are some attractive terms for the lenders:

Provider	Best Rate (APY)	Minimum Deposit
	3.75%	$500
Top 10 Bank CD's (Average)	3.65%	Typically, $2,500 or more
All US Bank CD's (Average)	2.90%	Typically, $2,500 or more
Wells Fargo	1.60%	$2,500

Recent Interest Rates on Prosper (30-day average)

 

Credit grade	Loan amount:	$1,000 - $5,000	$5,001 - $9,999	$10,000 - $25,000
AA		7.77%	8.73%	11.15%
A		10.10%	13.67%	15.14%
B		14.23%	14.99%	16.32%
C		15.79%	16.65%	20.11%
D		21.33%	19.07%	19.63%
E		27.58%	27.83%	35.00%
HR		28.58%	20.74%	-

Risks and Regulations

P2P lending companies prescreen all the borrowers and make sure they are able to make the loan payment. These companies can not guarantee though that loans will be paid off - these are the risks that all lenders take. For the most part borrowers should have a FICO score of 630-640 or more and will have to provide some other financial information like debt to income ratio, verification of income information and etc. If a borrower is late on payments, a late fee will be charged in addition to the loan payments. When the loan goes in default, the information will be sent to a collection agency and additional fees will apply. The information about the non-payment of the loan will be sent to the major credit reporting agencies and will affect the borrower's credit history.

The lenders' deposits are usually insured by state approved insurance companies until the money is transferred into a borrower's account. To minimize risks companies offer to create diverse portfolios where lender's assets are spread over several borrowers in smaller increments. Here is an example of portfolio plans and rates associated with various risk levels offered by Prosper.com:

Select:	Name and description	Est. loss1	Est. return2
	Conservative Bids on very low risk borrowers. View criteria | View listings | Copy plan	Very low risk	7.01%
	Balanced Bids on low risk borrowers. View criteria | View listings | Copy plan	Low risk	8.00%
	Moderate Bids on medium risk borrowers. View criteria | View listings | Copy plan	Medium risk	8.65%
	Aggressive Bids on higher risk borrowers. View criteria | View listings | Copy plan	High risk	10.21%
	Add my own Plan I want to build my own portfolio plan from scratch. Learn more

www.prosper.com/lend/portfolio_plans_choose.aspx

Chris Larsen, chief executive officer of Prosper.com said: "Person-to-person lending makes for a stronger sense of accountability because people are connected to each other, not banks." And that seems to be true. Where available, the statistics show very low rate of delinquent loans - usually from 0% to 6%. Lendingclub.com publishes the following figures:

Summary

From May 24, 2007 to March 28, 2008. The data on this page is updated weekly.

Issued Loans:	1,577	Amount Issued :	$14,405,925
Declined Loans:	11,592	Amount Declined:	$113,470,639
Loans Issued for 45+ days:	1,023	Amount Issued for 45+ days:	$8,704,950
Late Loans (31 - 120 days):	0.64%	Default (120+ days late):	0.00%

For purposes of the statistics presented on this page, the entire amount of principal remaining due (not just that particular payment) is then considered "late." Late loans are expressed as a percentage of loans issued for more than 45 days.

Normally P2P loan companies are registered as financial institutions and hold consumer loan, money broker, registered lender and other type of licenses issued by various states and allowing to conduct this type of business.

Gaining Business

According to an article on Netbanker.com the P2P business is making a steady growth. Prosper, Lending Club and Zopa had gained 100,000 unique users in February, 2008 which is a 16% increase compared to January, 2008. The following data was published to support the findings:

Lender	Launch	Feb. 2008	Jan. 2008	Mo. Growth	% Growth	Feb. 2007
Prosper	Feb '06	650,000	570,000	+80,000	14%	650,000
Lending Club	May '07	70,000	50,000	+20,000	40%	*
Zopa.com	Dec '07	16,000	14,000	+2,000	14%	*
Total		740,000	630,000	+100,000	16%	650,000

Source: Compete.com, estimated unique site visitors during Feb. 2008
*Not launched

What is in the future?

According to a report by Gartner (USA), an information technology research and advisory company, social or P2P lending will grasp 10% of the personal loan market by 2010.

Giles Andrew, co-founder and managing director of Zopa.com, said: "With recent average returns for lenders the best they have ever been at 8.1 per cent, with some enjoying more than 10 per cent, social lending has never looked so attractive. Borrowers continue to enjoy rates normally much lower than they can get from the banks..."

Another research company, The Social Futures Observatory (UK), has found that many internet users will consider taking a loan via social lending networks before they go to traditional lenders such as banks and lending institutions. The study author, Professor Michael Hulme, believes that: "For most people, banking does not provide any form of rewarding or valued experience, it is simply a necessity. In contrast, the community sites we looked at appeared to offer a much deeper appreciation of the individual far beyond the actual transaction."

P2P lending has converted the traditional hierarchical lending process into a horizontal one shortening the distance between lenders and borrowers and giving more control to both parties.

It is obviously another amazing innovation in on-line banking and it is becoming popular not only in the USA but all over the world. Many social lenders and borrowers enjoy it because it is easy and ‘cool'. Sure it is risky, but there are risks associated with any type of financial investment. And the idea is obviously spreading as fast as anything on the web! Some countries have lunched their own social lending networks: Boober in Netherlands and Italy; Frooble in Netherlands; Community Lend in Canada; La Tontine des Blogueurs in France; Smava and eLolly in Germany; and FairRates in Denmark. This list is just an example. There are more similar in idea or function companies whose goal is to bring people together and remove the middleman. For example, Webmoney, a different type financial company, incorporated social lending into their digital transactions where account holders can lend and borrow from each other. It will be as interesting to watch this trend develop in the world of digital money as to see it change the profile of conventional hard cash.

Marianna G, reporter of Ecommerce Journal