There is a great article on Harvard Business Review highlighting the rise in peer-to-peer lending. It is well worth a read in full:
With consumer credit still tight, peer-to-peer lending is on the rise. Why? For one thing, human society naturally evolves to create pools of capital with which to fund ideas and absorb risk. Roman legionnaires insured one another by swearing to care for the families of comrades lost in battle. The creation of the shared stock corporation allowed for bigger and bigger risks to be taken. Whenever people come together to create a pool of capital, the potential for wealth creation blossoms. For another, peer-to-peer lending is cheaper than consumer credit. Lending Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less.
Why now? First, the internet and social networks enable peer-to-peer interaction on an unprecedented scale. Second, electronic mechanisms for assessing potential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwriting information is hidden in there for those who know how to look. So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within five years every major bank will probably have its own peer-to-peer lending network.
To read more, which I thoroughly recommend, click here.
