Peer-to-peer lending

Peer-to-peer lending, or P2P, is the process of one entity lending money to another without a bank or other traditional lending institution being involved.

Peer-to-peer lending, or online marketplaces for consumer credit as they are more commonly called today, provide people with an exceptional way to borrow money at a fair and competitive rate.

 

People come to Prosper Marketplace to borrow money for everything from refinancing high-interest debt, to funding a large purchase, to starting a small business. It only takes a few minutes to apply online, and once they have completed the process they can have their money within a few days.

 

This level of ease and transparency is quickly making online marketplaces a popular option for borrowing between $2,000 and $35,000.

 

On the investor side, online marketplaces offer people and institutions the opportunity to invest in a new asset class and earn average returns of about 7%.

Aaron Vermut, CEO, Prosper Marketplace

The entire industry began to gain momentum as the effects of the recession started spreading in many parts of the world and leaving thousands of households swimming in debt.  Many, whose financial health was tenuous before the recession, succumbed once the value of their homes fell below the amount of their mortgage. With no collateral to put up for a consolidation loan, thousands were left with few options.

While most debt principals were bad enough, what kept people deeply in debt were exorbitant interest rates that, as they mounted, left people further in debt if they could only make smaller payments.  The total rose exponentially as the effects of the recession spread and more people lost their jobs, leaving them unable to make sufficient monthly payments.

In the United States, the dominant players are Lending Club and Prosper. Lending Club was founded in 2007 by current CEO Renaud Laplanche. As of June 30, 2014, they facilitated just more than $5 billion in loans and paid investors just under $500 million in interest.  Lending Club is preparing for an initial public offering that is being eagerly anticipated and is expected to be a watershed moment for the industry.

Prosper began operations in 2006 and recently surpassed the $1 billion facilitated loan total. They are growing at a faster pace than Lending Club.

P2P’s appeal is in lower interest rates which save the borrower money while at the same time allowing investors to make attractive returns, especially in the current interest rate environment. Borrowers complete biographical and loan information which lenders use to determine which loans to invest in. The more risk a person is deemed to present, the higher the interest rate they will pay.  On Oct. 20, 2014, the interest rate range for Prosper borrowers was 6.73%-35.36%.

The use of the word ‘entity’ instead of ‘person’ in the first paragraph is deliberate. As P2P becomes more successful, institutional investors are becoming involved. What began as one individual lending to another is now mostly institutions or groups providing the loans.

P2P is also very popular in other parts of the world. London, England based Zopa is the European leader, with £645 million lent as of October 2014. Their competitors include RateSetter, which has facilitated £373 million, and Funding Circle, which is approaching the £400 million mark.

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