Person-To-Person Lending

Earlier posts on this blog have discussed a variety of ways of financing your business. Most of these have been around for many years. With the advent of the Internet and particularly social networking, a new form of financing has arisen. 

 

Person to person (P-P) lending had a small, modest start several years ago. It has quickly grown to include multiple firms actively involved in the lending market. Approximately, $100 million in new P-P loans was initiated last year. The Online Banking Report forecasts this number to increase tenfold over the next two years. It is becoming so viable that major corporations like Virgin Group PLC and the Wall Street Journal and venture capitalists are taking notice. The Wall Street Journal’s Jane J. Kim wrote an article about this new form of financing this past March.

 

P-P lending works like shopping, dating, or other websites that gather like-minded individuals together. Instead of swapping wares or developing social relationships, P-P lending users are lending to and borrowing money from each other. Usually a small group desiring to be lenders will pool together to aid one borrower. Typically, the borrower will have posted a short bio that provides details about themselves, why they want the loan, how much they are seeking, and what interest rate they are willing to pay. From this point there are varying methods for finalizing the financial terms. Some are structured by the host (Virgin Money USA), some loans are bid on by potential lenders in terms of interest rate (Prosper.com), and others are chosen by the lenders, but the transaction is carried by an insured credit union. (Zopa.com)

 

The realm of person-to-person lending provides incentives to lenders and borrowers alike, regardless of the health of the economy. Lenders can often earn a better return with less risk than they would in the stock or bonds market. They also have the intrinsic reward of helping someone else. Borrowers of all credit ratings can obtain a loan easier with lower interest rates than from a traditional bank. Granted as the economy tightens, higher credit scores are more likely to find funds. Check out this NPR report for additional perspective on person-to-person lending. Or visit some of the lending sites, most have tutorials that explain their process in detail.