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Tuesday, May 21, 2024   
 

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 CardRatings.com. CardRatings.com offers a consumer report of US credit cards and instant online approvals. Named among the 'Web's Best Sites' by SmartComputing magazine! The site is courtesy of Citizens for Fair Credit Card Terms, Inc.
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Curtis Arnold

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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