Peer-To-Peer Lending Sites Weather Credit Market Storms
from the distributed-credit dept
Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth. Update: A number of commenters make some interesting points about default rates, suggesting that they may be higher than these sites would have you believe. Also, it's pointed out that there are a number of users playing both sides of the game -- borrowing at one rate only to lend out at a higher rate, which is not so different than traditional financial institutions.Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
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Prosper
I'm just shocked a) that it works, and b) since it works, that I haven't heard more about it. It seems like a huge deal to me.
I haven't checked out Zopa but I will now.
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Not really the Antithesis
With propser, essentially what someone does is lend out money at a higher amount then what they can borrow at. I've already seen several loans on the service for people who are raising money on the site, just to buy more speculative debt on the site. To me, this isn't really the antithesis of the hedge funds, it's some of the same tactics only on a smaller scale.
If sub-prime borrowers are walking away from their homes, there is no reason why they wouldn't also default on other unsecured loans. Just like we don't know how much leverage the hedge funds have used, I'd also argue that no one knows how much of propser's business is coming from credit arbitrage. It's an innovative concept, but if you are going to take on that type of risk, you should be asking for equity instead of debt.
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Re: Not really the Antithesis
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RE: Davis
Joe can borrow money at 6% from a bank, or "lend" to the bank at 5%. Say Joe has a 'A' credit rating.
Tom can borrow money at 8% from a bank, or "lend" to the bank at 5%. Say Tom has a 'B' credit rating.
Now, Joe could lend money to Tom at 6.5%. Joe is now getting 1.5% higher return and Tom is paying 1.5% less. Both are happy with this.
Joe is taking on extra credit risk by lending to Tom, but he's receiving a better return. It's classic risk vs reward.
I think this is a great idea for financially savvy people to increase investment options. Granted, I over simplified but the same principles apply.
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Prosper experiencing high defaults?
Prosper.com has, so far, seemingly failed to integrate the community component that has made microlending in developing nations successful. There is little to no peer pressure, if you will, that enforces repayment of loan obligations. It's one thing to have a collection agency come for you, and have a bad credit report, it's another thing entirely to have your family, friends, and entire village know that you're a delinquent.
Perhaps the social-network-lending model will work better - lending to people you know or people who know people you know - but that surely goes against grandma's wisdom of not lending money to friends or family.
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RE: High Defaults
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P2P Lending Sites Weather Credit Market Storms?
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Wrong conclusions
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Prosper Type Defaults Not Likely on SeedBucks.com
By Contrast, SeedBucks.com, which goes live in December 2007, allows only business borrowers. People starting a business are much more likely to pay back the loan than a person whos just got evicted.
But in all cases, it falls upon the lenders to exercise good judgment. If you loan money to 100 people and 10 default, you lost all your profit or more.
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Marketplace data is transparent.
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