In a 4/28/09 WSJ article, Jane Kim reviews the market for peer to peer (P2P) lending. Several companies provide a platform to bring together those who need money and those who have some extra.
A borrower fills out an application, stating their financial information, the amount of money they need to borrow and why they want the money. The P2P company verifies the identity of the borrower and pulls a credit report but doesn’t verify employment. Most of the companies have some minimum FICO score, a commonly used credit grade, that all borrowers must meet. The company then posts the loan request and investors bid on it.
LendingClub.com, PertuityDirect.com and Prosper.com are three companies using this model. At an average interest rate of 13 – 17%, borrowers can often get a better rate than using a traditional credit card.
At LendingClub.com, the delinquency rate was 4 – 5%, about the same as for credit cards. For investors, this is a way to earn more interest on their money. As always, with higher return comes higher risk. The P2P company makes its money by taking a fee on the loans.