Article explains peer-to-peer lending model, and its growth

May 19, 2015

NEW YORK (5/19/15)--The peer-to-peer lending model, which some have described as similar to the credit union model, continues to gain steam in the marketplace.

Peer-to-peer lenders allow groups of investors to pool money to make loans to prospective borrowers, and because these companies are all based online, they typically carry low overhead costs.

That combination produces interest rates that often beat traditional financial institutions, a fact consumers are slowly but surely finding out (Dallas Morning News May 18).

“I visited my local bank and asked for a $15,000 loan (to consolidate my credit card debt), but was offered an interest rate higher than my cards were charging,” said Ken Sweet, consumer finance reporter for the Associated Press.  

After shopping around online, Sweet found a peer-to-peer lender willing to loan him the $15,000 at an interest rate of 9%, far lower than the 13% offered by his financial institution.

“I never visited a branch or met a loan officer,” he said.

In addition to the attention from consumers looking for lower rates, Sweet that investors also have found peer-to-peer lenders as an attractive option.

While bonds are generating only 2% in interest and Treasury notes are yielding less than 1%, these online lenders are charging up to 30% in interest on the riskiest of borrowers.

As a result, these peer-to-peer lenders, which Sweet calls a misleading name as the majority of funding comes from hedge funds and other investment companies, have seen strong growth recently.

For example, San Francisco-based Prosper, one of the biggest peer-to-peer lenders in the country, originated $600 million in loans during the first quarter, more than tripling its output from a year earlier, according to Sweet.