Let’s say you go to your bank for a loan and find that your credit isn’t good enough, or that the home equity line you thought you had no longer exists because the remaining equity in your house has less value than than a wet cardboard box on skid row. What do you do if you need money for a security deposit to move into a new apartment, consolidate credit card debt, or pay a medical bill your (ahem) health insurance conveniently doesn’t cover? Never fear, here comes Pere-to-Peer (P2P) lending to the rescue!
“Twebster302” needed $1,200 for a root canal. “JulesWWC” wanted $13,000 to open a fair-trade chocolate shop. “Needhelp,” who said he’s a state employee, asked for $1,000 to get his finances in order and help his handicapped brother. […]
Known as peer-to-peer lending &mash; or P2P for short — it’s a 4-year-old industry that’s flourishing amid the current credit crisis.
“It’s a complete 180 in terms of how people look at their debt, but there’s no better time for something like this,” said Curtis Arnold, author of a book on the burgeoning industry.
And you thought you could only find love (or foreign brides) on line. Well surprise, surprise. Now you can go to Lendingclub.com, for example, and beg for someone to float your financial boat. Or, if you are tired of losing money in the stock market, you can take a chance at becoming a financier of someone else’s debts. It’s the Brave New World of internet lending!
You can even find a college loan there if you don’t qualify for the federal government’s financial aid programs. And, for all you private lenders investors out there these P2P loans may may even be regulated by the SEC (for all the good that will do you). As for borrowers, here’s a way to get funded by your rich relatives (i.e., anyone with a job) without worrying about running afoul of the IRS regulations on gifts — maybe*:
Are you on the good side with your rich Aunt Mary? If so, getting a P2P loan from Virgin Money to pay for graduate school might be a great option. Loans on this site are made between family members or friends, so lack of a credit history — or having a less-than-stellar one — isn’t an issue.
Of course, the questions about how safe the loans operations of these P2P lending organizations really are is another matter, entirely. Despite these companies having to register with the SEC, there is little real oversight of this growing market for what are essentially loan syndication networks. And what’s to prevent someone from inventing the next great Ponzi scheme under the aegis of a P2P lending site? And with the sites bundling lots of small loans by investors, some for as little as $50 to $100, the incentive for individuals to sue in the event of fraud is infinitesimally small. Considering the limitations placed on class action lawsuits put in place during the Bush administration, and the inability of the SEC to adequately monitor traditional Wall Street firms, much less jokers like Bernie Madoff, one has to wonder what the future will hold for this new “financial product.”
Still, for now, if you can’t find the money you need any other way, this may be your best bet. And if you are willing to risk some of your savings in order to get higher returns than what Bank CD’s, Treasury Bills or the stock market can offer right now, have at it. But if you do, don’t forget that old Latin saying: caveat emptor. In this economy, loans of any kind, even to family members, much less total strangers, are not certain of repayment. And even with the largest of these new online lending firms, what you think you know about the people who become your borrowers may be far less than advertised:
But lenders must be wary. Even sites that require borrower disclosure do not verify the data from all applicants.
Between Sept. 1, 2007, and Aug. 31, 2008, [Prosper.com, one of the largest P2P lenders] verified employment and income for only about 23% of certain borrower listings that were attracting a lot of lender interest.
That’s a big red flag, buckaroos. No real bank would make a loan to people whose income and employment it couldn’t verify. Even credit card companies do a better job of verification, and they charge significantly higher rates of interest to cover the risk of defaults (as most of you well know). So if you have surplus savings you want to risk in the hopes of getting an 8-10% return, be my guest. On the other hand, if you need a loan and want to get a significantly lower interest rate than what your friendly Megabank or credit card company would force down your throat, this looks like a reasonable thing to do.
* Please don’t consider anything I say here valid legal advice. Quite the contrary. I have no idea how the IRS would treat a loan between family members who make use of these sites.
