>YES LIVE: Small loans from person to person
Social networks provide a tremendous opportunity to meet small loan demand through person-to-person direct lending, according to John Donovan, COO of Lending Club. That’s because networks like MySpace and Facebook build connections between people, links that can be used to motivate people to invest in each other.
Lending Club is a peer-to-peer lending application available through Facebook, which has more than 50 million current users, with 250,000 new users joining every day. Each user can establish a “friend” relationship with anyone else on the network, and most do based on common interests.
Lending Club uses these links to bring people in need of money together with those who have it and are looking for better-than-market return. Potential lenders choose a risk level, which determines their “loan asking price.” Currently “low risk” translates to an interest rate of about 8%, while “high risk” sets a rate of about 14% (17.5% is Lending Club’s maximum).
Lending Club vets loan applicants, using conventional credit reports. It requires a minimum FICO score of 640. It is licensed in individual states to lend and resell loans.
Lending Club matches borrowers with lenders that fit the criteria. For example, Donovan displayed a borrower’s record showing need for $10,000 and a two-week deadline. To date, 15 people had offered 90% of the requested funds. Each lender was able to view the borrower’s qualifications, including credit rating, employment history, and intended use of the money. In the future, lenders will also be able to ask questions of prospective borrowers.
Prosper, the largest peer-to-peer lending service, has funded abuot $100 million in loans.
Zopa, the peer-to-peer lender based in the U.K., recently announced partnerships with several U.S. credit unions. The potential benefits to these credit unions include new loans and experience with new markets.