Peer-to-Peer Lending: Opportunity for Investors & Borrowers Alike
Prosper.com focuses on individual loans in the $2,000 to $25,000 range. Borrowers choose a loan amount, and they list what the purpose of the loan is. Investors then review loan listings and invest in listings that meet their criteria. The borrower then makes fixed monthly payments (collected by Prosper for the lenders) and investors receive a portion of those payments directly into their Prosper account. Individual lenders are able to invest as little as $25 in each loan listing they select and they get to consider credit scores, ratings, and histories, borrowers’ personal loan descriptions, endorsements (and participation) from friends and family, and community affiliations. Debt consolidation, home improvement, and small business-related loans remain the leading loan categories on Prosper.com.
CIO Joe Toms noted that the consumer lending market is about $2.4 trillion in America per Federal Reserve data, but the average loan size is about $7,300 and about 90% of the market is controlled by six of the largest banks. Mr. Toms noted, “P2P can attack a market that is grossly inefficient. The Federal Reserve data shows that the average credit rate on the outstanding consumer credit has been more than 15.5% from 1985 to 2010 and the historic default rate has been closer to 4.7%.” Effectively, this has left a net interest spread of well over 10% and the market is now available for investors to participate in.