Q and A with the authors of "Complete Idiot's Guide to Peer to Peer Lending," Curtis Arnold and Beverly Blair Harzog
by
Curtis Arnold |
| Curtis Arnold is the founder of
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1. What do you feel is the reason behind the
Social Lending phenomenon? (For example, ability to receive cash faster than if
applying for a bank loan, etc.)
Peer to peer lending's has really taking off in
the past 12 months or so due to several factors. The credit crunch has really
restricted the availability of traditional bank loans and other forms of
traditional credit, such as credit cards. As a result, consumers are
increasingly turning to other sources for credit and peer to peer lending has
emerged as a viable source of credit.
Cutting the banks out of the picture and putting
a more human element (borrowers can post pics and tell their story) back into
the lending process has been a breath of fresh air for both borrowers and
lenders. On a related note, lenders and borrowers can target affinity groups
that they are interested in, such as alumni groups. This feature has proven to
be popular and is pretty unique.
Also, the fact that many consumers are able to
get lower rates and many lenders are able to get rates of return that they can
in money market accounts or CDs has propelled interest in P2P lending.
2. How new is it really? Has P2P lending been
around for a while, but we're just hearing about it now?
Peer to peer lending isn't new by an stretch. We
have a section in the first chapter of our book that gives a brief history of
loans. Loans have been made among families and friends for thousands of years.
The new twist is that modern technology has made the process more efficient and
more formal.
Historically, loans among family and friends
weren't typically documented and/or formally structured. As a result, default or
delinquency rates for these type of loans have been higher than traditional
loans. New P2P lending sites are changing this. The sites act as 3rd parties and
structure loans in a legal and professional manner. This has resulted in less
defaults and, perhaps more importantly, less strains on relationships!
3. What are some pitfalls to avoid (that a
person might not expect) when lending via one of the popular sites?
A major issue is that many lenders don't
understand is that there's risk—just like there is in any investment. For
lenders, the prospect of a good return certainly exists (Lending Club advertises
over a 9% return). But there's also a chance you won't make money or might even
lost money.
For borrowers, one of the pitfalls is being
unrealistic about what interest rate you might get. In many cases, borrowers
save a lot of money on interest by getting a P2P loan. But everyone should be
realistic. If a borrower has a questionable credit history and low score,
getting a loan funded on a P2P site is not as easy as one might think. A savvy
lender will do his or her homework on the borrower's history. If a loan looks
risky, they might pass on it. So just be realistic. On the other hand, borrowers
who have good credit and many borrowers do usually end up with better
interest rates than they might get through a bank loan.
Another issue is making the assumption that all
sites are the same. Every site has a different platform, or way of delivering
services. There are also different credit score requirements to be a lender or a
borrower. Always read the FAQ's section on a site. Then send an email and ask
questions about how the site works, what the default rates are, and so on.
4. Are there some sites you feel are better
than others? If so, which ones and why?
Since each site is different, it's imperative
that individuals consider what their specific needs are. Lending Club just came
out of a quiet period and has a lot to offer, but you must meet their
requirements to be a lender or a borrower. Virgin Money and GreenNote are good
sites for those who need a student loan. Prosper was the largest P2P lender and
is back in business in a limited way. Prosper is changing its platform and so
borrowers and lenders need to study the site and ask questions. Here's the
bottom line: Know what your needs are, know your credit score if you're a
borrower, and research any P2P site you're considering.
--End--
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