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Credit & Borrowing Peer-to-Peer Lending
Credit & Borrowing Peer-to-Peer Lending | Peer-to-Peer Lending |
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Peer to peer lending is trying to re-establish the FFA(Family, Friends, Acquaintance) finance connection. Many a person, Richard Branson of Virgin for one has received the startup money for their business venture; down payment on a home/vehicle; or just to get by money from an FFA. In a perfect world, all the deals done using the FFA model would work and everyone walks away smiling….the reality is that ISH happens. When it does, money issues can strain even the tightest of relationships. This is one of the reasons the traditional banking method has become so common. If you don’t repay a loan to the bank your credit will be damaged…but at least you won’t have to see your banker at the next family function.
For Borrowers
Sites like Zopa(www.zopa.com) and Prosper(www.prosper.com) allow you to create listings for your loan. This is where you tell prospective lenders your story. Then investors(lenders) will bid on the loan. If your credit is stellar you receive the highest loan rating by that site which corresponds to a lower starting Interest Rate. At Prosper the loans are 3 year unsecured loans with fixed payments. At Zopa the loans are 5 year unsecured loans with fixed payments. When a lender bids on the loan they only bid on a percentage. So the loan is held by a group of individuals all with varying amounts. Nifty huh?! Depending on your credit and the story behind your need for the loan it is possible to get a better rate than at the bank.
Virgin Money(www.virginmoneyus.com) works a little different than the above sites and is closest to the old fashioned hand shake deals. With Virgin there is no bidding by strangers on the loan, you have to know the person doing the financing for you. Then, Virgin takes all of the dirty work out of FFA loans for you. They assist with drafting the loan agreement, payment processing, reminder emails and year-end statements. This way you can go to Uncle Roscoe to help finance your business idea and he will see that you are legit.
For Investors
At Prosper the investors have several choices for their dollars. They can bid on Portfolio plans that vary from conservative to aggressive—that are all dependent on the risk profile of the borrowers in that plan. At Prosper your investments are not guaranteed. The following page lets you know about the default rates and such. http://www.prosper.com/lend/performance.aspx
My personal favorite for investing options is Zopa. This is because Zopa partners with credit unions around the country to guarantee and insure the investment. When you invest through Zopa you actually purchase a Certificate of Deposit from one of the Zopa Credit Union partners. You then decide, depending on the borrower how much help you want to give them. If you know the borrower or think the idea they have is good you can actually lower their borrowing rate—this may reduce your return but it pays off with warm fuzzies. The ability to actually help someone AND get a guaranteed return is a deal that is tough to pass up.
Odds & Ends
--As an investor the returns that you make are taxable.
--Be sure to research the pros and cons of each model before investing. It is after all your money.
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