Peer to Peer Lending, Social Lending: Banking of the Future

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Services for Real Estate Pros with GreatFX Printing

Peer to Peer LendingA few weeks ago I came across a new way to invest and borrow money that I find absolutely fascinating. No, it's not Madoff's newest ponzi scheme or some guaranteed results program. It's called peer to peer lending, and after much litigation it was only very recently made legal under SEC laws, however, currently only residents of certain states can participate (see below).

Social lending is not a new idea, can be traced back to 1750 BC by the ancient Babylonian King Hammurabi.  Since recording data to stone tablets is a bit outdated, now we use the power of the Internet to enable people like you and me to lend and borrow money at our own discretion.  The notion is simple, yet powerful -- both large and small banks should take notice.

You down with O.P.M. (other people's money?)

Currently there are two major players in the American peer to peer lending arena.  LendingClub.com & Prosper.com.  In 2008, Prosper had a debacle with the SEC for selling unlicensed securities (whoops) but has since settled the case and is originating loans again.  In October 2009, Lending Club originated over $6 million in loans while Prosper originated $2 million.
(Source: American Banking News).

Combined, these companies and their social investors have originated over $251 million dollars in unsecured personal loans since 2005!

As a lender, you are investing in Notes. Each Note corresponds to a portion of a consumer loan, and gives the right to receive payments received under that consumer loan, minus a 1% service charge. Most Notes are purchased for a 3 year time period at a fixed rate of return.

As a borrower, one is able to borrow a minimum of $1,000 and up to $25,000.  Each borrower is assigned a credit rating, based on credentials assigned by the lending site you are with (more information on this below). Each borrower will have a story as to why they are borrowing money and what they intend on using it for. Some are consolidating debt, some are starting a new business, some are renovating houses, getting married or buying a car.  Lenders are free to ask the borrower questions about the use of their money and even ask for proof of documentation of finances, cash flow, business operations, etc.

You decide who and what you want to take a risk on.

Interest rates are determined by a bidding process. Lending peers bid on the lowest rate of return they would be willing to lend their money at for each borrower's case and credit rating. Because of this competition, the borrowers get the absolute best interest rate possible as a gauge in confidence in the borrower's rating and use of the money. As a matter of fact, borrowers are currently getting better rates on unsecured personal loans than they may through a bank!

Lending Club Rate of Return

Statistics from Prosper & Lending Club

Keep in mind that Prosper was the first lending site to the market, thus they have more originations.  Also note that Lending Club has tighter credit restrictions for borrowers than Prosper does.  Because of this, you will notice that Lending Club has a lower loss rate, and a slightly better rate of return.

Prosper.com:
$184,000,000 - Dollars Originated Since 2005
38,381 - Loans Originated
$4,794.00 - Average Loan Amount
15.12% - Average Yield
5.60% - Average Loss
9.52% - Average Rate of Return
(Source: Propser Marketplace Performance)

LendingClub.com:
$67,710,000 - Dollars Originated Since 2005
7,458 - Loans Originated
$9,078 - Average Loan Amount
12.58% - Average Yield
3.05% - Average Loss
9.67% - Average Rate of Return
(Source: Lending Club Statistics)

IMPORTANT - You can be a lender only if you reside in one of these states (as of 11/23/09):

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.

The following states are not yet eligible:  North Dakota, Iowa & Maine.

Trading Notes with Other Investors

Both Propser and LendingClub have recently integrated a Note trading platform for lenders to buy and sell debt notes to other investors.  Both sites conduct trading through FOLIOfn, member FINRA/SIPC.  Only Notes that were issued after October 12, 2008 can be traded on the Trading Platform.

Peer to Peer Lending Statistics

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Chris Brunner is an aspring real estate agent/investor and owner/developer of
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Re-Blogged 5 times:

Re-Blogged By Re-Blogged At
  1. Lina Robertson 11/22/2009 08:34 AM
  2. Lina Robertson 11/22/2009 08:35 AM
  3. Roger Johnson 11/23/2009 04:44 AM
  4. Harry F. D'Elia 11/23/2009 11:18 PM
  5. Dana Devine 12/02/2009 11:24 PM
  6. Anthony Ebright - NMLSR ID #247647 Purchase and Refinance Mortgages 12/04/2009 12:06 PM
Topic:
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Location:
Missouri Greene County Springfield
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Tags:
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peer to peer lending
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Show All Comments
Rainmaker
656,917
Joetta Fort
The DiGiorgio Group - Arvada, CO
Independent Broker, Homes Denver to Boulder

Bookmarked also - I wondered if bookmarking got the writer points so thanks for answering that question too!  Do you know how many bookmark it if we don't tell you?

Nov 23, 2009 03:05 AM #26
Rainer
63,256
Mark Warner
RealEspace - Plano, TX

Since commercial lending has dried up and will continue to be tight for the forseeable future, this is a great source, if you can get enough capital to do what you need to do.

Nov 23, 2009 03:14 AM #27
Rainer
45,296
Ceci Burklow
Pride of Texas Real Estate - Austin, TX

Great job at putting this information together Chris! I'll be bookmarking this too.
I agree with you that it is the lending of the future - especially after watching this mornings new about US debt and minimum payments in a few years - sounds like our government will be joining all the recent/current homeowners in not being able to pay their bills and that the banks will no longer be lending to any of us, scary stuff.

 

Nov 23, 2009 03:34 AM #28
Anonymous
Michael Goodheim

Thanks for this informative post - as someone in the business of factoring real estate commissions, I find this unsecured avenue to be an interesting alternative for clients who may be trying to get out of a cyclical bind (with the inability to sell a pending receivable).  Like Trent, I feel like there is a particularly purpose for all elements of the capital market - the internet has just made it easier to form and access capital pools than ever before.

Nov 23, 2009 03:53 AM #29
Rainer
20,397
Chris Brunner
GreatFX Printing - Springfield, MO
GreatFX Printing

Thank you all for commenting and for the bookmarks. 

Gene Riemenschneider: The notes are broken up into parts as specified by the amount of bids the borrower receives.  For instance, a borrower wants $2,000.00 and 80 lenders step up to the plate.  Each lender bids a minimum interest rate they want to receive as well as an amount no less than $25.00 to lend.  If each lender (80 total) lends the minimum $25.00, then you have your $2,000 spread equally amongst investors.  As Trent Dalrymle mentioned in his comment from a hard money lending perspective, this style of lending is interesting because the note can be divided into many parts, rather than one large sum.  This gives note holders the opportunity to greatly diversify their risk across many borrowers.

Joetta Fort: Unfortunately there are no point assigned from bookmarks received and AFAIK I cannot see who bookmarked nor can I tell how many times it has been bookmarked.  I'll suggest these features to the admins.

Cecilia Allan-Burklow:  I read that same report on the govt and debt, I'm going to write a post on that subject later today.  All you can do is hope for the best and prepare for the worst.

 

Nov 23, 2009 04:17 AM #30
Rainer
20,397
Chris Brunner
GreatFX Printing - Springfield, MO
GreatFX Printing

Thanks again for all the great feedback.  If you want to reward authors for great posts through AR points, the best things you can do are comment, reblog and flag for featured.  Bookmarking does not give points to the author (though it does give a warm fuzzy feeling). 

If you would like to pass some juice my way, simply reblog this post or flag for featured.  Thank you!

Nov 23, 2009 04:22 AM #31
Rainer
258,689
Mick Michaud
Distinctly Texas Lifestyle Properties, LLC Office:682/498-3107 - Granbury, TX
Your Texas Lifestyle is Here!

Actually, you can flag a post for a feature.  Just click the red flag beneath the body of any blog post and check the reason for the flag.  One option is to feature it.  Just follow the instructions on the flag form.

If a post is featured, the author receives 100 bonus points and featured status on the AR main blog page.

 

Nov 23, 2009 04:41 AM #32
Rainer
19,585
Ronald Borch
WJ Bradley Mortgage Capital Corp, S. Burlington, VT - South Burlington, VT

Thank you Chris for a fascinating post.  It will be interesting to see how P2P develops, as government lending expands and Fannie and Freddie continue to decline.

Nov 23, 2009 05:16 AM #33
Rainmaker
306,809
Vanessa Stalets
RE/MAX Elite - Brentwood, TN
REALTOR, Brentwood TN Homes, Real Estate

Wow, this is very informative and something I am not as up on as I should be. I too will be bookmarking this. Thanks!

Nov 23, 2009 05:42 AM #34
Rainmaker
725,923
Kimo Stowell
HI Pro Realty LLC RB-21531 - Honolulu, HI
REALTOR Associate® RS-76763 - Honolulu Hawai'i

Aloha Chris,

Peer to Peer lending has been happening successfully for some time now within tight knit ethnic communities all over the US. Local groups lending to their neighbors makes sense on many levels, unfortunately, greed and politics can squash any pragmatic approach to eliminating usury in our banking system. As long as profit margins dictate banking motives the American people will continue to be nothing but chattel to the Fed and it's membership.  The unholy alliance the Fed has with our government is unfortunate and the resulting fortunes in the bankers pockets enormous all at the expense of American citizens. 

Peace,

Nov 23, 2009 05:49 AM #35
Rainmaker
284,661
Tere Rottink
CoastalVa Realty Inc - Virginia Beach, VA

Very interesting.  You have done a thorough research on this matter. Maybe you can do one on private funding.  I have been trying to find about it, but research is not my strong point. 

Nov 23, 2009 09:28 AM #36
Rainer
8,600
Carolyn Hawkins
Allison James Estates & Homes, Inc. - Port Charlotte, FL

Chris, thanks for the information!  This is good to know since the banks aren't helping anyone...for the most part - people need to get some help from somewhere.

Nov 23, 2009 09:58 AM #37
Rainer
123,350
Marian Pierre-Louis
Fieldstone Historic Research - Medway, MA
Metrowest Boston

How absolutely fascinating and intriquing.  Finance is not my strong suit by I get the gist that this could be a good thing.  Share more as you find out more.

Nov 23, 2009 12:10 PM #38
Rainer
20,397
Chris Brunner
GreatFX Printing - Springfield, MO
GreatFX Printing

I will definitely post more as I find out.   Currently I am lending out the $50.00 they give you for signing up.  I have not yet put any of my own money into this, though I may end up investing a small amount soon.

Interesting also, is that as the borrower pays you back, you are able to immediately reinvest that money into other borrowers.  It's like compounding interest at super speed.

Nov 23, 2009 01:01 PM #39
Rainmaker
1,079,273
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

This is a great topic to write about. So many of us knew little or nothing about this type of lending. Bookmarked - and yes, points would be a good idea!

Nov 23, 2009 01:07 PM #40
Rainmaker
222,058
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

I have know about this for a while.  I am just not sure why anyone would be willing to lend money unsecured?

Nov 23, 2009 03:53 PM #41
Rainmaker
153,944
Kathy Opatka
RE/MAX CROSSROADS - Ocean City, MD
Serving Ocean City, MD, & The Delaware Beaches

This is a very interesting concept!  I can't wait to read MORE about it!

Nov 24, 2009 01:52 AM #42
Rainmaker
563,893
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Chris -- Fascinating post.  I remember hearing something on NPR about this a while back.  It will be interesting to see how this plays out over the long term.

Nov 24, 2009 09:48 AM #43
Rainmaker
534,605
Liz Moras Migic
Chilliwack, BC
Chilliwack, British Columbia - Realtor

I had to smile....I did a post on Peer to Peer Lending about a year ago - it's the first time I've seen one since.....cool...

Nov 28, 2009 05:41 PM #44
Rainer
212,582
Anthony Ebright - NMLSR ID #247647 Purchase and Refinance Mortgages
FHA, VA, Conforming, Jumbo - Wells Fargo Home Mortgage - Santa Rosa, CA

Hi Chris, I've sent you some google juice with a reblog. I also added to it with a note about KIVA. It's a similar lending program for 3rd world borrower's who are looking to create a business for themselves. Pretty interesting stuff. Thanks for a great post!

Dec 04, 2009 12:30 PM #45
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