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: juhansonin

Starting a business is an overwhelming thought. One of the first things to consider is the funding you will need to get off the ground. In the past, you would need to either find investors, an angel investor, or attempt to get a business loan. Today, peer to peer lending is a new option that people are finding it as a viable option for funding a business.

The advantage of using peer to peer lending is the scale of your application. When you apply to a bank or approach an angel investor this is just one potential lender. If you use peer to peer lending, you are submitting a request for funding to thousands of potential investors. Everyone that is on a peer to peer lending site is a potential investor. Large sites like Prosper have a couple hundred thousand members. That is an exposure not easily achieved through the other models.

There are specific peer to peer lending sites that are designed for entrepreneurs. 40 billion is one of these sites. They offer a large range of funding from $1,000 to $99,000. It allows you to then sell your loan and business by giving you the ability to upload power point presentations and video. You can also invite people to invest in your loan to gain exposure and possible funding. To further help entrepreneurs, 40 Billion has business to business classified. This list could include attorneys, web development, and business cards.

The cons of using peer to peer lending for business loans are the limited amount of funds you could receive. If your idea is a large one and you need more than just a $100,000 then peer to peer lending might not be the route you want to take. Secondly, the loan will not be in the business’s name but in a person’s name. This person is then responsible for the loan regardless of how the business does. As a single entrepreneur this might be fine, but getting funding as a group means one person needs to take responsibility.

Peer to peer lending for small business has its place. For a person looking for just some start up money or just to expand, it could be ideal. Also, there is no guarantee that it will be funded so the borrowers need to sell it. If you are thinking about applying for a peer to peer loan be very clear on what it is for and what are your goals. This is a sign of a person who has direct and makes for a more confident business proposal.

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

photo credit: wsilver

Person-to-Person lending (also known as Peer-to-Peer or P2P) is fast becoming an attractive way for borrowers and lenders to connect directly. It is like the EBay of the banking world. In the past, you would deposit your funds at the bank and depending on the amount and term, the bank would pay you interest. Current certificate of deposit rates range from 3.50% to 5.00% APY. Basically, the bank then makes loans with your funds and their income is based on the spread between your rate and the loan rate. Well, why let the bank have all of the fun? Now, you can lend direct and earn more interest.

There are three main services: Prosper.com, LendingClub.com, and Zopa.com. Prosper gives you plenty of details such as the credit score, Debt-to-income ratio, etc., so you can make informed lending decisions. Prosper.com allows the lender to seek additional details about the borrower, although the borrower doesn’t have to respond. Of course, then the lender doesn’t have to lend to them. Many lenders spread out their funds in $50 to $100 increments to minimize overall risk. Looking at data from Prosper (6/1/06 to 4/21/08), average rate of return for AA borrowers is 6.64%. Some people will sprinkle in some lower quality loans to try to bring the return up. Your funds aren’t guaranteed, however. With Prosper you can get started with $50.00. Certainly not much to risk, to get your feet wet.

Lending Club isn’t currently accepting new lenders. The site says, “Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future.” They use a system they call LendingMatch to suggest a portfolio of loans to the lender. It takes various aspects of your profile and matches you with borrowers that you may have a “connection” with. That connection can be you both like dogs and are MySpace addicts. The lender can override the suggestions and make their own decisions.

Zopa operates a little differently. They tie your investments in with an NCUA insured CD. They partner with various credit unions to accomplish this. As a result, your funds are insured up to $100,000, but the earnings compare with 1-year CDs. Currently they are advertising 3.75%. The minimum required to start at Zopa is $500.00. Zopa has a feature where you must agree to help at least one borrower out. You do this by reducing your earnings rate and as a result, reducing the borrowers loan rate. People helping people is the true theme of all three services. The fact that everyone mutually benefits makes it very rewarding.

I don’t think the person-to-person lending will replace other investment alternatives, but I do think it can add some return to a well-balanced portfolio. If you manage your lending portfolio well, the returns are certainly attractive compared to other investment vehicles. Our specialty will remain with quality, guaranteed returns in certificates of deposit, but I certainly believe putting some extra funds at Proper or one of the other services is a good idea.

For more information visit our Peer-to-Peer lending section on our site.

Chris Duncan is a FINRA Registered Representative. He specializes in helping clients find the best and highest CD rates nationwide. His clients include individuals, financial institutions, corporations, and public agencies. Please visit our Certificate of Deposit Rates page.

photo credit: epicharmus

Peer to peer lending is often considered riskier than other forms of investment. Looking at peer to peer lending sites like Lending Club, they state the risk of investment is at your own risk and if you are not able to loss your money don’t invest. This is stated on their prospectus with the SEC and this represents the worse case scenario for investors. This admission is often enough to scare the majority of people away. So why is peer to peer lending so risky and if it so risky why are people still lending?

The overall risk is based in the nature of the loan issued. It is unsecured. Meaning, it has no real collateral backing the loan as in an auto loan or mortgage. There is only a promise to pay the loan by the borrower. This is not the only type unsecured loan today. Every credit card and store credit is an unsecured loan. These loans or lines of credit carry a high rate of interest due to the fact they are unsecured. The same is in true of peer to peer lending.

How is peer to peer lending different than a credit card? There time period to pay off the loan or maturity. Loans are usually over a three year period. The borrower pays installments and not minimums. The goal is to completely pay off the loan by the term.

So how risky are the loans? They often carry the same risk that credit cards and other types of unsecured debt. The risk is always present of non payment or late payment, but many steps are taken by lending institutions to reduce this risk.

First, the qualifications for borrowers are clearly stated and include a credit check. The institution reviews the credit history, utilization, credit score and several other factors as well as employment to assign the borrower’s loan a grade. If a person does not meet loan standards they are rejected. These are often posted for investors to review. This provides reassurance that the institution is doing its job. Second, the pertinent information from the background and credit check is posted with the loan request. Lenders are allowed to review this information and make their own decision as to whether to invest or not. Third, lenders are not required to invest in just one loan. Lenders can take their capital and spread it out among several loans. This has the effect of diversification and helps to further reduce risk to the lender.

So why are people investing in peer to peer loans? The returns are high. A site like lending club list a return in the range of 6% to 19% depending on the loan funded. This is an extremely high rate of return and is far better than other investments. Secondly, the default rate is low. Lending club is currently listing defaults of 120 plus around 2%.

The risk is always present, but the right steps need to be taken to avoid them. Find a reputable site for peer to peer lending. They make sure the proper background checks are performed and reject the borrowers that are too high of a risk. A lender should diversify their holdings of loans to further reduce their exposure to risk. For most lenders, the returns out weigh the risk and make it a feasible investment.

If you want to learn more about investing in peer to peer loans visit Kyle’s website. There you will find excellent information about peer to peer lending

photo credit: ericskiff

If you have heard the term peer to peer lending or social lending or have never heard it before, the process is growing in popularity day by day. It definition is implicit in the name peer to peer lending and it is the process of individuals lending money to each other.

It is rooted with the idea that a bank should not play a large role and reap the majority of returns. In the model of social lending, the bank or financial institution facilitates the loans and get a small rate of return for doing so. In essence it is cutting down the middle man. To get the true underlying rationale, we need to examine the basic model of receiving a loan from a bank.

It begins with individuals using banks as a method of saving their money. The banks pay a low rate of return for the deposits as for the banks right to use the money for lending. On other side are individuals applying for a loan or mortgage. The bank takes the deposits it has and lends to the borrower at a much higher rate of interest. The difference in interest paid and interest earned is the bank’s revenue. In this model all of the risk is assumed by the bank. Meaning, the obligation of paying interest to the saver and preventing default of lent money is the risk.

With peer to peer lending the model is shifted. The bank or institution pays a much smaller role. An individual lender can choose what to lend and who to lend too and therefore majority of the profit from the loan is transfer directly to the lender. With this trade off of less bank involvement there is an increase in risk to the individual lender in the form of default. For the borrower, the benefit is more often than not a lower cost of transaction translating itself into a lower rate of interest on the loan.

How peer to peer lending is actually facilitated is an auction process with a basic market place provided by the lending institution. Which means the institution that processes the loans between individuals is the one that provides the method for individuals to find each other. Then the borrowers and lenders are able to select each other. Now, the lending to a person you have never met before does has its risk, but the presence and responsibility of the financial intermediary is to ensure individuals are accurately represented.

This is a concept would have never been considered until a few years ago. The internet actually is the stage that allows this to happen. The increase sociability of individuals caused by use of the internet provides this unique way to invest and borrow money never before possible.

To learn more about peer to peer lending or social lending, visit Kyle’s website. There is a more complete review of the topic.

photo credit: karpov the wrecked train

In the past getting a loan used to be a pretty intimidating process, getting dressed in your Sunday best, looking your best and venturing into town to the bank for a date with the Bank Manager. Once there you used to have to throw yourself at the mercy of the manager and plead for them to lend you money, getting declined for a loan was often a demoralising and embarrassing process.

These days applying for a loan is much more stress-free with the decision on whether you get given the money being based more on details such as your income, credit report and other factors, but still people can get turned down for reasons other than a poor credit record. In light of the recent credit crunch many banks are being more cautious about whom they lend money to and in some cases have ceased offering unsecured loans.

Luckily there is another option for those turned away, and no it isn’t visiting the local mafia! Peer to Peer Lending is a recent phenomenon in the lending business where organisations bring people looking to borrow money together with people who are willing to lend money. Companies such as Prosper, Zopa and Lending Club offer this service and have proved popular.

These personal loans are a bit of a hit and miss though with some lenders sticking to a high Interest rate in order to make their investment worthwhile, lenders are warned that the larger the amount they are willing to lend is, then the more risk they are putting themselves into. Obviously all loans from these services are not secured loans and so there is little equity for the lenders to be assured by.

Lenders are urged to check the site’s procedures for getting repayments as in some cases the lenders may default on their repayments and this is to be expected as the type of borrowers this scheme appeals to are mostly people who have been deemed high risk by the banks and refused conventional loans.

If you are struggling with debt and other expenses then maybe consider arranging personal loans for smaller amounts or if you need larger amounts and own property then consider secured loans as an option. As with all loans ensure you are able to make the repayments and consider the APR

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

photo credit: karpov the wrecked train

As the credit crunch continues, more and more business owners and entrepreneurs are turning to less traditional methods of business financing. Usually, the requirements for receiving these non-traditional business loans are not as strict as bank requirements, even during times of a booming economy. Now, as people who would normally qualify for bank loans are facing bank denials, the various non-traditional business financing sources are experiencing an influx of qualified applicants.

Peer-to-Peer Lending

Wikipedia describes peer-to-peer, or P2P lending, as a lending system that “…occurs directly between individuals (“peers”) without the intermediation/participation of a traditional financial institution.” According to a recent article, many peer-to-peer lending sites, say users are frequently listing “credit crunch” or “banks tightening their credit policy” as reasons for turning to social lending networks.

This type of lending often works out for the benefit of the borrower because lenders auction of loans online, competing for the borrower by offering lower interest rates. Usually the lender offering the lowest interest rate wins.

Angel Investor

An angel investor is an affluent individual who invests in start-up small businesses, providing funds for new entrepreneurs. Many angel investors participate in such investments because they feel they can get “…a higher return than they would see in traditional investments” (smallbusinessnotes.com). Some angel investors even join together forming angel groups and/or angel networks. Usually angel investors are also seasoned business owners and have already experienced the difficulties of business start-up. Therefore, they can offer advice, expertise and experience in addition to funds.

Merchant Cash Advance

A merchant cash advance is a form of credit card factoring. Borrowers sell their businesses’ future credit card receivables at a discount. Meaning they pay a flat rate for upfront money. Then the amount of the merchant cash advance and the flat rate are paid via the deduction of a small percentage of the businesses’ daily credit card sales. This small percentage is taken until the entire payback amount is repaid. Merchant cash advance borrowers can usually have their money in a matter of days after approval.

Gaston C. writes articles about Business Loans and Small Business Loans for Merchant Resources International.

photo credit: The Digital Movement

For individuals seeking a loan for the reasons of debt consolidation, auto loan, student loan, small business loan or any other personal loan, there is a new option of funding through peer to peer lending. This option is relativity new and has become a completely separate industry. It is growing at a fast pace and for many people find it services a need not easy filled by other options.

The idea is based in person to person lending and is much like lending family members or a friend money. The bank involved acts to connect individuals who want to engage in lending or borrowing. For the borrowers, the bank helps find lenders. For the lenders, it does all the due diligence on borrowers such as a credit check and handles collection of payment. The credit checks have the purpose to reduce risk to the individual lenders and assign a max amount the borrower can get and sometimes the interest rate on a loan.

Why do borrowers love peer to peer lending? There are several benefits. The first reason why, it is most commonly used is debt consolidation. It often gets a lower rate than other forms of consolidation and at the term of the loan the debt is completely paid off. The second reason is it is easy to seek funding. If trying to start a business, a business loan is very difficult to get from your local bank and if denied the person has to go bank to bank. With peer to peer loans, lenders often find you. There is a bit of selling your loan in the market place, but it is available for funding to thousands of potential lenders. Third, the interest rate is often lower than other forms of personal loans. Peer to peer loans reported by Lending Club, a peer to peer lending site, have an interest rate starting at 6%. This depends on your credit standing. In comparison, a credit card is usually around 10% to 20% interest and can go as high as 30%. Furthermore, the rate is set and not subject to change like a credit card.

Why do lenders love peer to peer lending? The biggest reason is return. The rate of return, reported by Lending Club, ranges from 6% to 19%. This is extremely high rate of return in any investment. The second reason is actions taken to reduce default by peer to peer websites like Lending Club such as the initial credit screening. They list the default rate at just above 2%. This is low considering these loans are unsecure, meaning there is no collateral backing the loan. To further curb the risk, lenders are not allowed to fund just one loan with their capital. They must spread it out among several loans as to diversify their risk.

There are several other reasons and many could be personal to the individual lender or borrower as to why people love peer to peer lending. Its history is relatively short and for the most part unknown. The trend of growth in peer to peer lending will not slow for sometime as more people discover this alternative method of investment and credit.

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