Saturday, August 17, 2013
AVOID BANKS & BORROW MONEY FROM THE PEOPLE: PEER TO PEER LENDING IS THE FUTURE!
The method is not without its disadvantages as the lender has very little assurance that the borrower, who traditional financial intermediaries may have rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the lending system employed, in order to compensate lenders for the risk that they are taking, the amount of interest charged for peer to peer loans may be higher than traditional prime loans
Miserable bank savings rates have led depositors to turn to "peer-to-peer" companies such as Zopa, RateSetter and Funding Circle for extra income.
Thanks to their slimline structures, peer-to-peer firms can offer better loan rates to borrowers and higher returns to investors. Similar to eBay, the peer-to-peer platform takes a cut for its matchmaking services.
There is a small manufacturing company in the northwest of England that is looking for £150,000 of working capital. It is traditionally the kind of need that might have been met by a bank loan. But, in the post-crisis world of bank belt-tightening, it is now the bread-and-butter of upstart peer-to-peer (P2P) lenders.
It is hardly surprising, then, that the industry is growing at breakneck speed. In the UK, P2P has grown from nothing in 2007 to lending nearly £380m at the last count. There are other hotspots -- most obviously in the US -- where the two biggest P2P operators have together lent more than $1.7bn over five or six years; but also in less developed financial markets, such as China and eastern Europe. Even the establishment is taking notice. Lending Club, the leading US operator, now has a beefy board including the likes of John Mack, former head of Morgan Stanley, and Larry Summers, the former US Treasury secretary.
In the UK, meanwhile, the local arm of Spain's Santander is preparing to team up with Funding Circle to help finance SME loans -- in an echo of similar link-ups in the US. At the same time, Morgan Stanley has given its wealth management clients access to investments in Lending Club.
P2P has a long way to go. The industry lends a few billion dollars, which is microscopic in the global scheme of things. Even after shrinkage, there are 28 banks with assets of more than $1tn each.
Nevertheless, the excitement surrounding P2P is palpable, prompting some existential questions. Could this quick, dynamic, empowering, fast-growing form of lending change the face of finance for ever? Could P2P do to banks what Amazon has done to Walmart, and what Twitter is doing to media brands?
Less than a decade ago, peer-to-peer lending came to the United States as an upstart enterprise - a service that would in a very personal way link would-be borrowers with individual lenders and bypass the banking industry.
Both Lending Club and Prosper say they placed a record number of new loans in April, with the former at $140 million in loans and the latter at $20 million. While that still may represent only a drop in the broader consumer-finance bucket, it is attracting attention, and more money. By acting as intermediaries, the lending services collect fees ranging from 1 to 5 percent from borrowers.
peer2peer "peer 2 peer loan" loan lending bank banking global "lending club" trends trends trending "peer 2 peer lending" online marketplace price portfolio "small loan" borrow borrower investor investing "interest rate" individual "loan application" grade diversify u.s. "united states" u.s. america "loan interest rate" "online banking" wealth wealthy elite future savings "savings account" "wall street" gold silver bullion investment "make money" The industry has won some high-profile endorsements of sorts. Google Inc led a $125 million refinancing of Lending Club in May, and former U.S. Treasury Secretary Lawrence Summers serves on the company's board, for example. Prosper has picked up new venture funding.
But it is not just the venture funding that is distinguishing the new era of P2P - it is the involvement of a new breed of lenders. With bonds disappointing and bank instrument interest rates near record lows, professional investors are lending through major P2P sites to bolster their returns.
THOSE PESKY DEFAULT RATES
To minimize the risks of those default rates, experts recommend that investors stay highly diversified, lending around $25 to each borrower in their portfolio. That makes it hard for individual investors to manage any decent-sized portfolio - there are a lot of borrowers to check out and payments to follow.