Peer-to-peer online lending grows in tight economy
By Laura Bruce • Bankrate.com

The credit crunch has meant that many deserving consumers, who once qualified for home equity or personal loans, are being shunned by banks or offered loans that cost too much. On the flip side, the effort to fix the credit crunch is sticking savers with miserly interest rates. Put two groups of unhappy people together and they just might do business.

P2P, an abbreviation of peer-to-peer or person-to-person online lending, has been around since 2005, but it's getting a boost from the current economic environment. There are three main P2P companies in the U.S.: Prosper, Zopa and Lending Club. (The latter is partially sitting on the sidelines as it deals with regulatory issues.) Combined, these outfits expect to originate $100 million in loans this year as an increasing number of people circumvent banks and take this alternate route to get an unsecured loan financed or to earn better yields on cash.

"Home equity used to be the cash management tool for the credit-worthy borrower, and that has really, really dried up," says Chris Larsen, CEO at Prosper. "In many ways, Prosper's three-year, $25,000 loan is a pretty good proxy for what people were using home equity for -- improving their home, starting a sole proprietorship, college costs and certainly for replacing credit card debt.

"On the return side, people that are getting 3 percent if they're lucky (can find) it's pretty easy to get returns that might range from 5 percent to 11 percent (on Prosper)."

Mark Schwanhausser, a financial services analyst at Javelin Strategy & Research, says their study shows that credit card debt is the main reason people want to engage in P2P lending. "We're forecasting that P2P lending specifically for credit card balances will grow from $38 billion in 2007 to $159 billion by 2012."

Douglas Dolton, CEO at Zopa, says they expect to also see growth in student loans. "The most popular loans are home improvement and debt consolidation -- the elimination of credit card debt. But education loans, I think, will be very large this summer as the rest of the student loan business sort of falls on itself. Car loans in the U.K. are very popular and we've seen a fair number of them in the U.S."

Growth of P2P
It's been little more than a year and a half since I last wrote about P2P. See the previous article, "Person-to-person lending: High return, but risky?" for a look at how P2P generally works.

Back then, Prosper, which considers itself an eBay-style marketplace, was the only option for U.S. consumers. CircleLending, now called Virgin Money US, existed, but it was set up to manage loans between family and friends. Zopa, a U.K. outfit, hadn't yet launched its stateside operation.

Today, Zopa is available in the U.S.; Fynanz is available as a student loan marketplace, and Loanio says it's coming soon. In Canada, CommunityLend is available in beta launch, and IOU Central is partially shut down due to regulatory matters. But, as mentioned, the big three in America are Prosper, Zopa and Lending Club, the latter of which is not accepting new lender registrations or allowing current lenders to loan additional money. Lending Club's Web site says it's because the firm is registering with securities authorities to offer promissory notes.