P2P Lending has been in the mainstream media news a great deal lately. I decided to post a roundup of many of the recent news articles on Prosper.com, Lending Club, Zopa, GlobeFunder, and Virgin Money. It is unfortunate that Lending Club entered a quiet period just as they were gaining tremendous growth in loan volume.

CNBC February 5th, 2008: From Zero to Millions: Financing Your New Business:

Online Family Lending Use a lending network designed for inter-family loans, such as CircleLending.com. Tools at that site will help you and your relative come to terms on the length of the loan and the interest rate, and calculate the monthly payment amount. For $99, CircleLending issues a legally binding promissory note and a repayment schedule. For $9 per payment, the company will set up automatic repayments using electronic funds transfer.

Peer-to-peer Lending: Several websites now make it much easier to find an investor who will back your business. Check out prosper.com, lendingclub.com and zopa.com.

Lending Club’s founder financed his first company with personal loans and high-interest credit cards. He eventually sold the business to Oracle. That experience inspired his new company. Lending Club, which launched on Facebook in May 2007 and on its own site last September, uses technology to match borrowers to lenders willing to offer unsecured loans of $500 to $25,000 with three-year, fully amortizing terms.

The author, Laura Rowley, must have used some old notes because CircleLending.com was long ago purchased by Richard Branson and converted into Virgin Money.

Forbes February 11, 2008: Banking 2.0: New Capital Connections For Entrepreneurs:

Credit-market carnage makes it all the more important for small businesses to understand the full range of potential sources for capital. A growing alternative to traditional sources: person-to-person lending Web sites.

These sites, with names like Prosper.com, Zopa, Lending Club and GlobeFunder, use social networking tools and other software to simplify the borrowing and lending of capital between strangers and even family and friends. For entrepreneurs, these sites offer an alternative and needed source of capital. For lenders, the fast-growing sites offer competitive rates of return and the opportunity to easily participate in the cornerstone activity of capitalism.

I wonder if Maureen Farrell noticed that Globefunder’s lenders are the hedge fund set which I hardly call peer-to-peer lending.

Prosper.com employs an eBay or auction-style model and lets potential lenders both determine the interest rate and who gets funded in a several-week bidding process. Zopa.com used the auction model in the United Kingdom, but in the United States where it launched in December, it works directly with credit unions and lets these unions set the interest rate and decide whether to fund. Borrowers can lower their interest rate by asking lenders to purchase certificates of deposit against their loan for rates of 4.25% or below, and credit unions guarantee the CDs. Lending Club also sets the borrowers’ interest rate based on FICO scores and determines who gets funded. Once a rate is set, Lending Club matches lenders and borrowers by personal interests through their Web site or via Facebook. Borrowers share their stories, and then have a time window to see if enough lenders are willing to fund the loan.

GlobeFunder and Virgin Money USA don’t use social networking mechanisms. GlobeFunder allows borrowers to appeal for funding, determines an interest rate range, and then working with its partners–institutional investors and hedge funds–finds out whether there’s enough interest in the loan to fund it. Richard Branson’s new venture, Virgin Money USA, which was formerly Circle Lending, facilitates the transfer of money between friends and family. Friends and family members negotiate rates, but Virgin Money sets up payment schedules and legal documents and charges fees accordingly.

So Maureen Farrell did notice that GlobeFunder is for hedge-fund lenders. She probably wrote up one of the most concise descriptions of P2P lending sites I have seen in the above two paragraphs.

Right now, default rates at Prosper and Lending Club are relatively low, but that could change with the downturn in the economy. Prosper’s CEO Chris Larsen says the rate of default is now around 4.7%. At Lending Club, borrowers with poor credit are excluded and therefore interest rates are lower. The site has only been in operation since mid 2007, but as of now, Lending Club claims to have a 0% default rate and says that only a small fraction of borrowers–0.012% –have made late payments (30 days or more).

Maureen, you forgot to ask Chris how many loans are late. It can take months of zero payments for a late loan to be considered in default on Prosper.com. And with Lending Club you should have asked the average age of the loans. I mentioned this problem with Lending Club’s statistics in this post on loan rejections. LendingClub’s loans have not aged enough yet for people to actually rely on that late payment statistic for a basket of three-year loans.

What is the potential market for these loans? Analysts predict a huge surge in demand. Javelin Strategy & Research, a Pleasanton, Calif.-based financial services consulting firm, estimates that demand in the person-to-person lending market could hit $159 billion by 2012.

Forbes also put together a concise guide to the peer to peer lending sites.

FOX Business February 11, 2008: Bypassing the Bank:

Peter Barnes talks to Renaud Laplanche, Lending Club Founder & CEO, about LendingClub.com, a social networking website for peer-to-peer lending.

Time February 28, 2008: Hey, Buddy, Can You Spare $10,000?:

WHO DOES IT [p2p Lending]: Bernadette Lui of San Jose, Calif., has $3,125 spread among 13 three-year loans. She earns 14.6% and is considering reinvesting her returns with new borrowers. “They’re pretty small dollar amounts on each loan,” Lui says. “I figured it would be acceptable if someone defaulted.”

Bernadette Lui should have spread her money across more loans. In fact, should could have picked 62 loans rather than just 13. Considering that she on average loaned out $240 to each of 13 people, just one default will significantly impact her ROI.

Washington Times March 2nd 2008: Wanna Talk Money?. The article actually spends more time on sites such as Wesabe and Geezeo, but does include peer to peer lending:

Others have opted for niche sites. Some, such as Covestor.com, allow investors to see how their portfolios compare with others. Social lending sites, such as Lending Club and Prosper, bypass banks to match lenders with borrowers. Buxfer.com and BillMonk.com help roommates, friends and relatives keep logs of shared expenses. NetworthIQ helps people figure out in a public forum what they are worth in dollars…

Some people, such as Phyllis Wright, 48, are just looking for a way out of debt. The customer-services representative who lives in Clinton borrowed $9,000 from the Lending Club to pay off some of her credit cards. “I knew that I had so much debt that I didn’t even bother to try to get a loan from the bank because I knew I would have been turned down,” she said.

She got a 12 percent interest rate, much lower than the rate she had on her credit cards. She had been paying her credit cards about $450 a month. Now she pays Lending Club $301. She still has credit card debt, but “that was a big help,” she said.

Since September, when the Lending Club expanded from a Facebook group to a public Web site, it has issued about $9.5 million in loans, said Renaud Laplanche, founder and chief executive. Last month alone, it doled out about $3 million. Laplanche attributed the rapid growth to the credit crunch that has squeezed the mortgage market and seeped into other forms of lending.

Laplanche said borrowers must have a minimum 640 credit score, no more than a 30 percent debt-to-income ratio and no delinquencies. To minimize risk, lenders make small loans to each person. That way, if one recipient defaults, lenders are still likely to get a return from their investments in other people’s loans. So far, Laplanche said, fewer than 1 percent of all loans have been in default.

“People tend to not default on other people in a community if they feel connected,” he said.

I think Prosper may have already proven that last statement incorrect. I hardly ever lend on Lending Club or Prosper based upon some social or geographic connection, but when I do, I always let the borrower know — just in case Laplanche is correct.

ABC News April 5, 2008: Social Lending Networks, New Alternative to Banks:

There is a video of Murphy who received a 25,000 loan from Lending Club at 12% to fund his popcorn business. The lender Bernadette Lui (mentioned in the time article) is in the video and she mentions that two of her loans are already late. So her return is not going to be so attractive. The video mentions a different estimated ROI for Bernadette — over 15% — than the return mentioned in the Time article. So I was right… Bernadette should have spread her risk across more loans.

No single lender carries a full loan, so the risk is spread out among several people. The borrowers get a fixed rate, based on their credit score, which is usually a better rate than the bank would give and much better than they would get using a credit card.

Bernadette Liu has loaned out a total of $3,125, spread over 13 different borrowers. She’s earning almost 15 percent on her investment. She says that’s a lot better than the stock market or even bank CDs. But she said she is worried about two of her loans on which the borrowers are late making payments.

“It’s a newer venture, so you never know,” she said. “But I think my funds are diversified enough.”

When she says her funds are diversified enough, I wonder if she means just her Lending Club loans or her entire investment portfolio. If she is talking about her Lending Club loans alone, I think she is wrong. She could have invested her three grand across 62 loans at $25 each or 31 loans at $50. If you want to try P2P lending, please invest across more loans. See the articles at Prosper Lending Review and Rate Ladder on the subject of P2P loan diversification.

US NEWS April 8th 2008: Surviving the Crunch:

Ryan Feig, 35, founder of Zensah Performance Apparel, a Miami innovator of seamless compression sportswear. Projected 2008 sales: seven figures
“My experiences with banks have been extremely difficult—even though we sell to teams in the NBA, are a 3-year-old company, have great technology and have some of the greatest athletes. Lending Club [an online social lending network] has been a savior. It’s true capitalism for borrowing. Tomorrow, even if there is no more credit crunch, I think people are going to have better access to capital through people-to-people lending than, let’s say, a bank.”

CBS March 21, 2008: In Credit Crunch, Lending To Each Other:

At a time when credit is hard to come by, more Americans are turning to a new source for money: each other. It’s called person-to-person lending, and it’s expected to rise 800 percent in the next couple of years.

…He was paying 31 percent on his credit card. And now he’s paying …

“Ten percent,” Brown said.

…Those with some money like Clemens, and those who need some like Brown, are now able to get together on Web sites like LendingClub.com and Prosper.com.

Since CBS News first reported on Prosper.com a year ago the credit crisis has made person-to-person lending take off, nearly tripling Prosper’s customers to 630,000.

This article also includes a 2:35 minute video (after the advertisement):

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