Getting a personal loan just got a little more personal. The internet has created a lot of peer to peer applications and social media websites. You're definitely going to recognize a bunch of the companies involved in this field, like MySpace, Facebook, Joost, and the list goes on. The internet used to be a place where you went to view information. Now it's a place where you can get information and provide information to others. This is the social component, because now it's a two way street. This has been the case in regards to music, commentary, sharing applications and so on. And now that social component is going one step further, into the world of lending and borrowing money.
Several firms have organized websites where everyday people lend and borrow money from one another. This is peer to peer lending and it is getting a lot of traction on the net. This news is really big because it is such a departure from the status of lending firm versus the individual borrower. The banking industry will never be the same.
One of the most prominent (and first on the scene) companies involved in peer to peer lending is Lending Club. This new firm is designed to match those who want to get a good return on their money with people who are looking to borrow money at a more favorable rate than they would get at a bank.
Here's how it works. When you join Lending Club you have the option of loaning money or borrowing money. The goal of someone who needs a loan is to obviously qualify for the amount they need and to have a reasonable (the lower the better) repayment terms. No one wants a loan with a 23% interest rate, so they are going to search for a 11% interest instead. This is just an example, but the point is to get the best terms possible. On the other hand, the lenders are looking to get a better return than the banks and thrift institutions are willing to pay. And now that interest rates have been reduced so drastically, the banks only want to pay a very small interest rate to their customers.
The whole purpose of Lending Club and all peer lending companies is to cut out the middle man, the bank! With the internet and social media becoming so advanced, what is the need for the banker? That is the theory that Lending Club has. Their job is to match people who need to lend money with those that need to get a better return on their money. The role of the banker traditionally has been to handle this. And before the internet the banker was a necessity. There would be no way for people to find other people who were willing to lend to each other. But with the creation of modern web communications and the adminstrative firms like Lending Club, the process is not only possible but makes a lot more sense than just going to the bank.
Peer to peer lending is relatively new and will continue to grow. A few other companies that are diving into this market are Prosper Marketplace and Loanio. However, this business is still in its infancy and there will certainly be more players coming along. WIth the bad economy looking as it's here to stay, it creates a permanent need for peer lenders. First, the rough economy is going to make it harder than ever to get a loan at a traditional lending firm, whether it's a huge national bank or the local bank. Savings and loans will also be more restricted (or go out of business) and credit unions will be limited as well. On the other end of the spectrum, the bad economics will create an ongoing demand for capital to be loaned to working individuals who have trouble coming up with enough equity to buy a car, appliances, or any other substantial purchase. Ongoing financial troubles for this country create a major need for peer lending, as a substitute for old time lending that has been the cornerstone of finance.
Lending Club has made some great strides into the future. The user friendly set-up and the growing customer base makes Lending Club the best choice right now for peer lending. This may change, as more players enter the market. Peer lending could be the answer for people who are having trouble getting a loan through their bank, or for someone who is sick of paying the bankers way to much money. Payday loans and credit cards are now running at 20% plus APR's, if not much higher amounts. Short term borrowing doesn't need to be that expensive. Peer lending is going to slowly eat away at the firms who have been charging the high rates.
Peer lending is going to be the future. Might as well start getting involved now.
