Peer-to-Peer Lending Networks Offer Alternative to Traditional Personal Loans

Peer-to-peer lending networks have risen from humble beginnings to mainstream use in only a few years. This formerly obscure lending strategy is now well known among personal loan borrowers — and well used.

These ‘person-to-person’ lending programs are flourishing not only in the United States, but overseas as well. A recent story by British newspaper The Telegraph suggested that peer-to-peer loan networks could someday break the banks’ ‘stranglehold’ on small business lending. An overstatement? Perhaps. But it shows how peer lending has become a legitimate force within the financial industry, in the U.S. and abroad.

According to the author:

“So called ‘peer-to-peer’ lenders could account for more than 15 percent of the SME [small and medium enterprises] lending market if untapped demand from companies and retail investors is realised.”

In England, peer lending is available for individuals and small businesses alike. In the U.S., it is primarily geared for individual borrowers seeking personal loans (though one could certainly use the money for business purposes).

How Peer-to-Peer Lending Works

How do these peer-to-peer lending networks operate? The name says it all. It works like this. I need a small personal loan to pay for a home-improvement project (let’s assume). I prefer to use an unsecured loan, one that is not secured with collateral such as my car or house. I would also like to have a broader range of options, when it comes to the interest rate and repayment term.

Enter the peer-to-peer lending network. These web-based personal loan networks allow me to skip the bank and borrow directly from other individuals, or from a pool of individual investors.

So I post my loan request on the peer-to-peer lending website, where investors can see it. My personal loan gets funded, and I can pay it back over time, even using auto debit for convenience. Ideally, I’ll secure a lower interest rate than what the bank would offer. (Traditional, bricks-and-mortar banks often charge higher rates than peer-to-peer networks, because they have higher overheads as well.)

These networks offer certain benefits for investors, as well. In the context of peer-to-peer lending, the investor is the person who provides the actual funding for borrowers.

Earlier this month, financial publisher Kiplinger did a story on the “10 Best Ways to Earn More Interest on Your Savings.” Peer lending made their list. What are the benefits for investors? According to the author, “you can examine the credit quality of loans you purchase and create a diversified portfolio to minimize the risk.”

Major Players in the U.S.

In the U.S., the two biggest peer-to-peer lending networks are Lending Club and Prosper. Both companies are located in San Francisco.

According to its website, Lending Club’s online network has generated more than $1.6 billion in loans, since the company first began operations in 2007. Their investors funded more than $127 million last month alone.

“What we do is connect the source of capital directly with the use of capital,” said Lending Club CEO Renaud Laplanche, speaking to a USA Today reporter.

Rival company Prosper also appears to be on the fast track to growth. According to a company press release, the peer-to-peer lending network experienced a major jump in loan origination. In February, origination was up by 201% over the previous year.

In many ways, peer-to-peer (P2P) loan networks work like an online marketplace. This is not the traditional bank relationship where you have one funding source with rigid requirements. Instead, borrowers can shop around for the deal that best meets their needs.

Disclosures and disclaimers: We do not endorse, work for, or represent any company mentioned in this article. We publish news relating to personal loans and lending. But we are not lenders. Nor do we recommend one lender over another. The publishers of this website have an affiliate-based relationship with one or more of the peer-to-peer lending companies listed above. Despite this relationship, we strive to publish factual and unbiased reports on this industry.