The Federal Reserve Bank of Cleveland released a report this week that is bullish of the future of crowdfunding.
“Peer-to-Peer Lending is Poised to Grow” authors Yuliya Denyanyk and Daniel Kolliner believe that because P2P fills two gaps it will continue to grow for some time.
Peer-to-peer lending is quickly emerging as the go-to option for people with limited credit histories who have few other reasonable choices. The authors cite Equifax data showing that 39.8% of Americans with credit histories of less than three years have credit scores more than good enough to qualify them for a loan, denied only by the fact their histories are deemed to be too short.
Peer-to-peer lenders not only lend to that 40 percent but use additional data such as SAT scores, income levels and employment sector to determine an individual’s suitability for a loan.
Five out of six people use peer-to-peer loans as a one-time action to eliminate costly credit card debt which can come with interest rates much higher than P2P loans. P2P rates have been lower on average for four years.
The authors caution not everyone gets a cheaper rate on their peer-to-peer loan. Roughly half of prospective borrowers have histories which place them in the top two categories that come with the lowest interest rates. Borrowers with lower grades may see little benefit. P2P investors also know where their bread is buttered, for when banks increase their credit card interest rates P2P lenders decrease theirs.
Peer-to-peer loans have a slight edge when it comes to repayment. Over the past four years, 3.2 percent of P2P loans were past due compared to 3.7 percent of traditional consumer finance loans. P2P had a lower share of non-performing loans in 10 of the 16 quarters.
Even though the total sum lent by P2p investors is a trickle compared to bank loans, the increase in the volume of money being dedicated to P2P sets it up well for continued growth, say the authors. Institutions are dedicating money to them and more and more people want to borrow in the sphere.
Since 2Q ’07, aggregate bank consumer finance loans have declined in value by two percent each quarter while total credit card loans are declining 0.7 percent each quarter.
Peer-to-peer lending has been growing at 84 percent per quarter over the same time frame.