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A Loan Together
By Jane J. Kim When Jeff Walsh wanted to refinance the small-business loan on his coin-op laundry, he didn't want to take a chance that his bank would reject his application. "Ijust bought a house in 2007 and was a little nervous about what the bank would say about my debt-to-income ratio."
Instead, Mr. Walsh recently borrowed $22,500 on Prosper.com, an online lending network that matches individual borrowers and lenders. The interest rate on Mr. Walsh's loan: 10.25%-several percentage points below what he says he would have had to pay at a bank.
Getting Stingier Person-to-person lending is a small but fast-growing corner of the Web economy. New sites are jumping in, including Virgin Money USA. Roughly $100 million in new P-to-P loans was issued in the U.S. last year, a number that is expected to jump tenfold by 2010, according to Online Banking Report. Some larger financial institutions have begun to take notice of P-to-P lending, saying that offering loans through the sites is a way to bring in more deposits and reach more consumers. Of course, as the economy slows, online lending faces the same default risks as bank lending. To reassure lenders, Prosper is giving them more information about borrowers' credit and employment histories. Some sites are making it easier for lenders to spread their investments across multiple loans, thus diversifying lending risk. And many of the newer players, such as GlobeFunder.com and LendingClub, are restricting loans to those with stronger credit. Alex Kalempa recently applied for a $15,000 loan with Associated Bank to help expand his business, which makes parts for motorcycles. But the bank offered him only a $1,000 credit line, although it later increased it to $5,000. He also applied for a business credit card with Capital One Financial, but was offered a credit line of just $500. Instead, Mr. Kalempa turned to LendingClub, where he got a $15,000 loan at 9.6% in January. "Banks are getting stingier these days," says Mr. Kalempa. "When Iapplied for a personal line of credit with Associated Bank five years ago, they gave me a $15,000 credit line with no problems." Associated Bank declines to comment on specific customers' situations. But David Baumgarten, the bank's executive vice president of regional banking, says the "banking industry as a whole has clearly tightened some of its lending standards." Borrowers, Lenders Connect Here's how online lending sites generally work: Individuals looking for loans create listings that detail how much they want to borrow, what they're planning to use the money for, and how much they're willing to pay in interest. People with money to lend can browse the listings, which include details about borrowers' credit histories, and bid on the loans they want to fund. At Prosper, one of the biggest players, borrowers are assigned a credit grade, based on their credit scores. Borrowers pay a one-time fee ranging from 1% to 3% of the loan amount, depending on their credit score, while lenders pay 0% to 1% of their principal balance. Prosper works like an eBay-style online auction marketplace, with lenders and borrowers ultimately determining loan rates. Other sites, such as Zopa and LendingClub, offer fixed rates to investors and borrowers. The rates that borrowers pay depend largely on their credit history, income, debt and other factors. Prosper is currently offering borrowers with high credit scores of 760 or more, and who want relatively small loans, average rates of 7.76%. For individuals with credit scores in the mid-to-high 600s, seeking to borrow between $10,000 and $25,000, currently posted rates range from 14.47% to 22.67%. Individuals who are lending via these networks say they are drawn to them by the opportunity to earn better returns than traditional investments such as stocks, and by the chance to help out real people. They say the credit crunch is locking even borrowers who are good risks out of the traditional debt market. Some larger financial institutions have begun dipping a toe in P-to-P lending, hoping to get in on the ground floor as the lending networks are expected to grow. Zopa is currently working with six credit unions, including Forum Credit Union and USA Federal Credit Union. "The merging of financial services and social networking is a great way to reach the younger generation," says Doug True, senior vice president of Forum Credit Union. Three Tries P-to-P lending sites have been around for a couple of years, providing small, short-term loans mostly to individuals looking to pay off credit cards or other expensive debts. But as the credit crisis spreads to nearly all types of bank lending, borrowers who previously turned to home-equity loans or credit lines are turning to P-to-P sites as alternatives. That has helped to spur a jump in loan requests from borrowers with stronger credit profiles, says Chris Larsen, Prosper's CEO. Another small-business owner, Patrick Kelley of Lexington, Ky., says he turned to Prosper after trying three times over the past several years to get a small-business loan to help fund his instant auctions and eBay consignment business. Mr. Kelley says his loan applications were rejected each time because his business wasn't yet showing a profit. Instead, Mr. Kelley managed by relying mainly on home-equity lines of credit and private funding from his business partners to kick-start his business. "It was hard for us to get a traditional loan, being an upstart business," Mr. Kelley says. "Banks weren't familiar with the business model of selling people's stuff on eBay for a commission." Mr. Kelley ended up getting an $18,500 loan through Prosper at 10.97% last fall. And the process was much quicker and easier than going through a bank. He estimates that each bank-loan application he submitted took several months to prepare. "There's more paperwork, and banks want an updated business plan and tax returns," he says. By contrast, he says the loan-application process on Prosper took a couple of weeks, from the time he applied for a loan to the time the money was in his bank account. Another lure, some participants say, is the chance to do business with like-minded people. Mark Olson of Ormond Beach, Fla., applied for a Prosper loan because he liked the idea that real people, not a big bank, would be investing in his business. In December, he got a $13,000 loan at 11.09% to help start a new business operating Radio Shack franchises at Nascar race tracks. "These people who join in as lenders are entrepreneurs," says Mr. Olson. "And Ireally appreciate anyone who is of the entrepreneurial nature." | ||||||||||||||||||||||||||||
As
the credit crisis spurs traditional lenders to tighten credit standards and raise
fees, more small-business owners and entrepreneurs are turning to so-called person-to-person
lending networks-like Prosper, LendingClub.com and Zopa.com-to help keep their
businesses going. The unsecured loans are tiny, usually no more than $25,000.
But borrowers say they are able to get loans more quickly and with less paperwork
than at a bank. And people with good credit are able to lock in lower rates-often
8% to 12%-than they would otherwise have to pay on credit cards or unsecured bank
loans.