Peer-to-peer lending

Δημοσιεύθηκε: 9 Δεκεμβρίου 2008 - 07:10

What do you do when your bank's gone away? Get by with a little help from your friends, naturally. Peer-to-peer lending – which lets friends and complete strangers lend small amounts of money to each other over the internet – has enjoyed a surge of interest in recent months as banks have cut back on lending, often even to creditworthy customers.

The idea is simple: starving musicians, entrepreneurs or other people in need of a small loan (usually less than $25,000) can log on to a P2P lending site to tell their story. Fellow web surfers with money to spare parcel out funds to worthy applicants. The P2P website, which collects fees from both parties, works with borrowers to ensure repayment at a pre-agreed interest rate. In theory, borrowers benefit by gaining access to new sources of credit. Lenders run the risk of default but are rewarded with decent returns – about 10 per cent, according to Zopa.com, a UK-based service.

Taking out the banking middleman is no cure-all for broken credit markets, however. To reduce the risk of default, P2P sites subject borrowers to rigorous screenings. One lender, Lending Club, reportedly denies 86 per cent of loan applications. That may lower the default rate but the price for this security is that many potential borrowers are excluded. Lenders, meanwhile, must be willing to hold on to their investments, sometimes for several years, while they wait for borrowers to repay. Some sites – having come under pressure from US regulators to register the loans brokered on their sites as securities – are moving to address this last problem by creating secondary markets for P2P debt. The idea is that lenders can gain liquidity while offloading risks on to third parties more willing to bear them. The net result is that, in the end, P2P doesn't look all that different from traditional banking – except that we are all loan officers now.

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