Sunday, July 20, 2008
The Rise Of Peer-To-Peer Online Lending
Some people are finding it tougher than ever to get a bank loan amid the nation's credit crisis, but many are getting a warmer welcome at the "teller window" on the Web. People are flocking to social network sites such as Prosper.com and Zopa.com, which connect lenders and borrowers at the grassroots level, using an eBay-style auction of loans and interest rates.
Sites and players have multiplied in the nascent industry -- known as peer-to-peer online lending -- which is barely 2 years old. Traffic has increased at a double- or triple-digit pace in the past year, according to Compete, a Boston-based online research firm.
"More people are turning to these alternative loan providers to get their cash as it has become more difficult to get a loan from the established providers," said Mike Perlman, director of Compete's financial services practice.
Jerry R. Brown of St. Cloud, Fla., said he turned to peer-to-peer online lending after conventional banks rejected his bid for a loan to expand his firearms business. He landed a US$10,000 loan at 15.4 percent, which enabled him to establish a holster factory at his business.
"That was significantly better than I could have gotten with a conventional bank," he said. "The whole process has gone without a hitch. I'd do it again in a second."
Brown used the site run by Prosper Marketplace, the San Francisco-based company that dominates the peer-to-peer lending space. He registered on a Prosper.com auction, told his story, described his need and identified his desired loan amount and rate.
Prosper managed his loan "application" and analyzed his personal financial information to develop a credit grade it provides to potential lenders. More than 30 of them responded to Brown's auction, and they became his financiers.
Prosper's loan approvals and dollar values have increased 20 percent to 30 percent during the past year, the company said. Nearly 12,700 borrowers received more than $84 million in financing from July 1, 2007, to June 30, 2008.
With small business lending declining -- SBA loans decreased nearly 20 percent last year -- many entrepreneurs are tapping into online social lending, although the loans typically are capped at $25,000, officials said.
Prosper has also seen a big increase in the number of people with good credit who are using the service, spokesperson Tiffany Fox said. About 40 percent of its borrowers have credit scores higher than 720 -- considered prime creditworthiness -- she said. Only 5 percent are now subprime borrowers (people with a sketchy credit record), compared with 25 percent when Prosper was introduced in 2006.
"There's a flight of people in the higher end of the credit spectrum turning to alternatives like Prosper," she said. Prosper's site drew nearly 777,000 unique visitors in June, a 31 percent increase from the same month last year and almost 15 times more traffic than the second-largest player, the British site Zopa.com, according to Compete.
The demand for online social lending has attracted a flurry of new players in the past year or so, including Zopa, Lending Club, Virgin Money USA, GlobeFunder Ventures and On Deck Capital. Each has its own niche: Lending Club takes an approach similar to Prosper; Zopa matches borrowers with a network of credit unions; GlobeFunder appeals largely to high-end customers; Virgin Money (formerly Circle Lending) focuses on family and friend loans; and On Deck focuses on small-business loans.
The growth spurt in online social lending is expected to continue for the foreseeable future, according to a recent report by Celent Communications, a high-tech consulting firm in Boston. Loan volume is projected to reach $1.6 billion this year, a nearly threefold increase from 2007, the firm estimated. It is expected to double in 2009 and reach nearly $6 billion in 2010.
However, despite such growth projections, those using peer-to-peer online lending are still "a very small subset of the overall number of people in the market for loans," Perlman said.
"It hasn't quite become as established and commonplace as eBay, for example, which says that people are much more willing to buy and sell goods online than borrow their money," he said. "We're still very much in the early adopter stage for social online lending."
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Sites and players have multiplied in the nascent industry -- known as peer-to-peer online lending -- which is barely 2 years old. Traffic has increased at a double- or triple-digit pace in the past year, according to Compete, a Boston-based online research firm.
"More people are turning to these alternative loan providers to get their cash as it has become more difficult to get a loan from the established providers," said Mike Perlman, director of Compete's financial services practice.
Jerry R. Brown of St. Cloud, Fla., said he turned to peer-to-peer online lending after conventional banks rejected his bid for a loan to expand his firearms business. He landed a US$10,000 loan at 15.4 percent, which enabled him to establish a holster factory at his business.
"That was significantly better than I could have gotten with a conventional bank," he said. "The whole process has gone without a hitch. I'd do it again in a second."
Brown used the site run by Prosper Marketplace, the San Francisco-based company that dominates the peer-to-peer lending space. He registered on a Prosper.com auction, told his story, described his need and identified his desired loan amount and rate.
Prosper managed his loan "application" and analyzed his personal financial information to develop a credit grade it provides to potential lenders. More than 30 of them responded to Brown's auction, and they became his financiers.
Prosper's loan approvals and dollar values have increased 20 percent to 30 percent during the past year, the company said. Nearly 12,700 borrowers received more than $84 million in financing from July 1, 2007, to June 30, 2008.
With small business lending declining -- SBA loans decreased nearly 20 percent last year -- many entrepreneurs are tapping into online social lending, although the loans typically are capped at $25,000, officials said.
Prosper has also seen a big increase in the number of people with good credit who are using the service, spokesperson Tiffany Fox said. About 40 percent of its borrowers have credit scores higher than 720 -- considered prime creditworthiness -- she said. Only 5 percent are now subprime borrowers (people with a sketchy credit record), compared with 25 percent when Prosper was introduced in 2006.
"There's a flight of people in the higher end of the credit spectrum turning to alternatives like Prosper," she said. Prosper's site drew nearly 777,000 unique visitors in June, a 31 percent increase from the same month last year and almost 15 times more traffic than the second-largest player, the British site Zopa.com, according to Compete.
The demand for online social lending has attracted a flurry of new players in the past year or so, including Zopa, Lending Club, Virgin Money USA, GlobeFunder Ventures and On Deck Capital. Each has its own niche: Lending Club takes an approach similar to Prosper; Zopa matches borrowers with a network of credit unions; GlobeFunder appeals largely to high-end customers; Virgin Money (formerly Circle Lending) focuses on family and friend loans; and On Deck focuses on small-business loans.
The growth spurt in online social lending is expected to continue for the foreseeable future, according to a recent report by Celent Communications, a high-tech consulting firm in Boston. Loan volume is projected to reach $1.6 billion this year, a nearly threefold increase from 2007, the firm estimated. It is expected to double in 2009 and reach nearly $6 billion in 2010.
However, despite such growth projections, those using peer-to-peer online lending are still "a very small subset of the overall number of people in the market for loans," Perlman said.
"It hasn't quite become as established and commonplace as eBay, for example, which says that people are much more willing to buy and sell goods online than borrow their money," he said. "We're still very much in the early adopter stage for social online lending."
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