Lending gets personal
By Blake Eligh • Bankrate.com

If you've ever hit up your mom to pay the phone bill, or are pining for your own piece of the personal loan business, there's a new option. Peer-to-peer loans, also known as P2P or social lending websites, have been in Europe and the US for a couple of years. The service is finally migrating north with the February launch of the Canada's first private loan provider.

P2P sites like UK-based Zopa and US sites Prosper and Lending Club promise to cut out the middleman by directly connecting borrowers and lenders. Through P2Ps, borrowers can score loans at rates lower than those offered by banks or credit cards, and lenders can make a buck by investing in a short-term loan.

Prosper, which launched in 2006, is the largest US P2P provider, with more than 580,000 members and over $117 million in funded loans to date. Trend watchers predict this new breed of lending could be worth $5 billion by 2010.

Canadians are finally getting a chance to get in on the action with the recent launch of Montreal-based IOU Central. Toronto's CommunityLend and Vancouver-based PeerMint are expected to launch later this year.

According to CommunityLend CEO Michael Garrity, unsecured loan potential in Canada is worth over $100 billion annually, with interest on those loans amounting to about $15 billion. "A lot of that is people who are using their credit cards as loan vehicles at 17 to 22 percent," Garrity says. "We give them an alternative at a significantly lower rate than they are paying."

A borrower or lender be?
Prospective borrowers post a profile, complete with credit score, a loan request and a persuasive story in the hopes that potential lenders will like what they see and invest in their cause. Typical loan requests range from the mundane -- paying off credit cards, home repairs, and taxes -- to the fantastic, like the applicant wooing backers to fund his backyard missile silo.

Lenders peruse the listings and bid to provide the loan. Borrowers review offers and decide whether the rates and terms work for them. They can accept multiple agreements with a variety of lenders.

On the American P2P sites, the average loan is about $9,500 and is funded by 22 to 25 people. Interest rates vary depending on the borrower's credit score and how much risk the lender wants to assume. At Prosper, the average rate falls between 7.79 and 11.25 percent but goes as high as 29 percent. By comparison, a typical Canadian credit card rate is about 18.5 percent, and banks charge 5.75 to 12.90 percent for a $5,000 unsecured line of credit.

For the lenders, returns on microloans compare favourably with more traditional investment options. P2P loans can earn five to 25 percent, with a mean return of 12.32 percent, while a staid GIC earns just 2.76 percent.