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photo credit: AmandaLouise

With banks constricting their lending opportunities for borrowers these past months, The New York Post’s video about the benefits of person-to-person lending is a short but incisive analysis of the credit program. The concept is simple: financial intermediaries are eliminated but the firm manages to match borrowers and lenders together minus the additional cost charged by banks in traditional lending schemes. The online transaction allows a borrower to seek lower interest rates, bypassing the services of a bank while in the comforts of their home.

However, the rates won’t keep getting lower. Lenders naturally have to base their interest rates with that of the central bank’s and other zero-risk investment opportunities’. After all, alternatives for newer lending practices such as P2P are always available and can be substituted at a more secured return from the government.

Prosper.comhas gained popularity with its low-fee, no prepayment penalty, and fixed-interest rate proposal. Borrowers set the maximum interest rate and lenders bid on the best rate that they can offer in return. The lowest bid wins and the borrower then receives the loan directly to his bank account. Other online lending firms like Lending Club and Loanio have their separate marketing schemes as well.

Why Choose P2P?

Borrowers strapped of needed cash can avail of loans with lower interest rates. This makes it ideal for those needing urgent financing. In fact, some institutions may offer collateral-free programs provided that potential borrowers meet certain criteria in their credit standing.

Most programs also offer fixed interest rate loans that can secure borrowers against fluctuating rates in the market. Other fees also remain low primarily because firms save from expenses on office infrastructure and funding costs.

The Drawbacks

Zopa.com in the United Kingdom is not regulated by the government but by a different agency according to one a study . Regulation in the United States has to be firmly laid out yet to assure lender confidence in their P2P transactions since this type of lending only began in 2005.

Risk assessment is still another issue that most of them have difficulty perfecting. While borrowers can be referred by friends, colleagues and former borrowers in the lending institutions, the lack of more effective credit investigation measures possessed by universal banks is another setback in their screening methods. This view is however opposed by The Economist in its issue a year ago. They see this weakness in asset-backed commercial papers issued by banks instead.

Lastly, the rate of return is not always guaranteed as many borrowers have defaulted and eventually brought down an entire company. Lenders and borrowers need to verify the fines against late payments and defaults so they can be aware of lender protection in a specific firm.

Into the Crisis

P2P Lending aims to benefit both borrower and lender. In fact, those who have lower FICO scores but manage to obtain credit in select P2P firms can improve their credit scores eventually. Now that banks have pulled their lending reins, borrowers can seek refuge to this alternative lending offer. It is sensible however to keep in mind that greed played a large factor in the excessive loan sales that spawned the crisis that we are currently experiencing. As such, proper regulation and oversight in the activities of these firms must be set uniformly much as banks do get constant monitoring as they improve risk profiling and transparency among the borrowers.

Andy Denton of http://www.Realty.com

photo credit: justgrimes

There is a tendency for people to think when bad news about the economy strikes the worst thing they could do is attempt to start a small business. This could not be farther from the truth. There is no such thing as a bad time to start a business, provided you go about it the right way. Check the news again. When large corporations are failing and looking for bailouts, small businesses keep on ticking. A small business owner that keeps a tight rein on operations and serves the public with products or services valuable enough to be taken in exchange for money will survive a bumpy ride.

Start Looking for a Lender Right Away

Any “grey beard” entrepreneur that has made it through the economic swings that seem to part of a natural cycle will tell you not to invest every personal cent you have in your business when starting out. You need to protect your personal assets and savings to take care of yourself and your family while you are building your business income. Nobody will stop you from investing some of your own money, but include acquiring a business loan as part of your start up strategy. There are some steps you will need to take to prepare for applying for a loan, and if you have already been rejected by the bank for a loan you have no choice but to pursuit another avenue.

Do your market research and be certain the product/service you are about to put on the market is viable. Survey everything you are planning to do and make the adjustments as necessary. Give the market what it is willing to pay to have. Make a very detailed business plan.

Choose the correct corporate structure for you business and register with the state. Get all your paper work in order and establish a proper bookkeeping system right off the bat. Find out exactly what your responsibilities are for paying taxes and retaining employees. Get your Employer Identification Number (EIN).

Register with Dun & Bradstreet (D&B) for the purpose of getting a Paydex score. Look for all the ways you can get accounts under your business name and out of your personal name. Set up vendor reporting with D&B. Eventually you will need to get your hands on a list of businesses that extend lines of credit to small business owners and use those to start building your business credit score. You can get as much as $35k through business credit. Get a credit card in your business name and use it wisely.

Money Available Regardless of the Economic Times

If you were expecting a magic formula to get an instant business loan, this is it. But it will take a little time. Depending on your diligence it could be a few weeks to a few months. No traditional banker or alternative lender will give you a loan with a decent interest rate without you doing these steps. You must build up your credit profile and business credit score first. It is the only way you can get money for your business that is not based on your personal credit and will not put your personal assets at risk. In the meantime you can use your business lines of credit from the list mentioned earlier to help get your business started.

Don’t wait. Start your business now. Get free information at Strong Business Credit for starting a business. Go to Inital Underwriting Group to get business credit & business loans.

photo credit: norrelb

With any investment or loan there needs to be an interest rate charged. Lending Club uses a formula that takes into account several factors, but it really begins with the assigning of a loan grade.

The first step in getting any peer to peer loan on Lending Club is borrowers must apply for a loan. Upon this request, Lending Club begins to evaluate the potential borrowers’ credit standing. This information is taken and used to assign the borrower a loan grade. These grades range from A to G with A being the highest and G the lowest. To further narrow down grades, each letter grade has sub classes. These are numbered from 1 to 5 with 1 as the highest. These loan grades will then be used in every part of the Lending Clubs formula for calculating interest rates.

The formula is made up of two distinct parts. They are the based rate and the adjustment for risk and volatility. The sum of these equals the interest rate charged.

The base rate is the interest rate charged on every loan. For most peer to peer loans on Lending Club it is 9.05%, but can be different for the A grade loans. Grades A1, A2, and A3 get a base rate of 7.05%. A4 and A5 get a base rate of 8.05%. This lower rate represents the decreased risk for this category of borrower.

The second part, the adjustment for risk and volatility, is a bit more complex. It begins by using the grade assigned to calculate an “assumed default rate.” This assumed default rate is then doubled and is used as the adjustment for risk and volatility. This creates an interest that is increasingly proportionate to the default risk of the borrower.

To further explain lets calculate the interest rate on a peer to peer loan from Lending Club. If a borrower is assigned a loan grade of C3, the base rate is 9.05%. The assumed default rate calculated by Lending Club is 2.05%. This makes the adjustment for risk and volatility 4.10%. Now the base rate plus the adjustment for risk and volatility equals an interest rate of 13.15%.

Lending Club does reserve the right to change both the base rate and the adjustment for risk and volatility. This only applies to incoming loans not to preexisting ones. This flexibility allows Lending Club to adjust for the market conditions and ensures the loans stay attractive to both borrowers and investors.

These rates no matter how they are assigned are attractive to both borrowers and lenders. The rates are usually lower than several other options of funding for borrowers and lenders get a rate of return normally above 10%.

To read more about peer to peer lending visit Kyle’s website. There you will find excellent information about peer to peer loans