A form of lending between individuals, known as “peer-to-peer lending” has boomed over the last decade, due in part to the growth of online financial transactions. CCTV America’s Karina Huber reported the story from New York City.
Peer-to-peer lending offers options for borrowers shut out from banksA form of lending between individuals, known as "peer-to-peer lending" has boomed over the last decade, due in part to the growth of online financial transactions. CCTV America's Karina Huber reported the story from New York City.
Lending Club is a U.S. website that connects non-traditional lenders with borrowers. The website recently went public and rose more than 50 percent from its IPO price on the first day of trading.
The site helps provide funding for everything from homes to holidays capping loans at $35,000 for individuals and $100,000 for businesses.
Lenders are paid between 6-25 percent in interest for these small loans, which is an attractive return for investors.
“Bank deposit products right now, many of them are earning less than 1 percent,” Greg McBride, chief financial analyst for Bankrate.com said. “Your top yielding CD’s are paying a little over 2 percent, but you have to invest for several years to earn that rate of return.”
Government bonds have not yielded much more, which has helped make peer-to-peer lending more popular.
In 2013, the U.S.’s two largest players were Lending Club and Prosper. The two companies had issued $5 million in loans by May 2014, and they continue to double their business every two months.
“The growth in the industry has just been spectacular, primarily because of the opportunities that have been generated through the mortgage crisis,” Larry Muck, chairman of the American Association of Private Lenders said.
The crisis led to tougher regulation that raised banks’ lending standards to the point where many customers now find it impossible to get a traditional loan.
“The loans that our private lenders are making are typically not done by banking anymore,” Muck said.
The successful model has not gone unnoticed by Wall Street. Institutional investors including hedge funds and pension funds now represent the bulk of lenders on platforms such as Lending Club and Prosper.
Experts have said it’s not a bad thing for borrowers, as it means more available credit. However mom-and-pop lenders, who initially dominated the industry, have complained that the larger businesses now get access to all the good deals, because they can offer loans at lower rates.
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