See how peer-to-peer lending has taken off in the US — and what the world can learn from it.
While it’s still a newer form of borrowing, peer-to-peer lending has been around in the US for more than a decade. How did it start, how is it regulated and can other markets learn from our wins, our losses and where the market is headed?
LendingClub Personal Loan
As an alternative to bank personal loans, LendingClub offers you the chance to borrow up to $40,000 to use for whatever you need. Rates from 6.95% to 35.89%* APR based on your credit score.
- Recommended Credit Score: 660 or higher
- Minimum Loan Amount: $1,000
- Maximum Loan Amount: $40,000
- Loan Term: 3 to 5 years
- Turnaround Time: As few as 3 days
- Total Costs: Depends on your credit score.
What is peer-to-peer lending?
Also referred to as P2P lending, this relatively new form of credit takes control of the loan process out of the hands of traditional lending institutions. Borrowers can apply through an online platform for personal loans, often unsecured, that are financed by one or more “peer” investors.
The P2P “lender” is not an actual lender, but rather an intermediary that facilitates the lending process and provides the platform. These platforms have developed in US, UK, Australia and other financial markets, but the US remains a leading market for peer-to-peer lending.
The financial sharing economy in the US
Beginnings and regulation
Peer-to-peer lending has come a long way in the past decade. The first company to offer peer-to-peer lending was Zopa, a UK company that has since issued more than $2.9 billion in loans since it was founded in February 2005.
In the US, the prospect of loans funded without the help of banks started in San Francisco in 2006. Its beginnings were small: February 2006 saw the launch of Prosper, followed by LendingClub. Now the largest peer-to-peer platform in the world, LendingClub started as one of Facebook’s first applications.
Before 2008, P2P lenders had fewer restrictions on borrower eligibility, and their offerings weren’t registered as securities. This changed in 2008 after the Securities and Exchange Commission (SEC) intervened, citing the need for compliance with the Securities Act of 1933.
This led to major changes in the P2P space. Lenders were required to register with the commission, which kicked LendingClub out of action for six months before it could be reactivated. Others left the market altogether. Zopa’s CEO cited registering with the commission as the “key reason why we didn’t launch … in the US.”
Luring borrowers and investors alike
In 2008, the US found itself deeper into the global financial crisis. When the banks weren’t willing to lend money, borrowers began turning to peer-to-peer platforms. Even those who were able to borrow from traditional banks found better deals from P2P lenders. Investors, shying away from the volatile stock market, now in a downturn, saw P2P platforms as less risky.
This mindset continues today, with prime and subprime borrowers able to access credit for more competitive rates and investors willing to provide them with the funds.
Are the returns worth it?
Since 2009, investors have seen average net returns of between 5% and 9% for prime and subprime borrowers through LendingClub and Prosper Marketplace. In May 2014, LendingClub reported that it had saved borrowers $250 million in interest charges. In that same year, it facilitated $4.4 billion in loans through its platforms.
P2P is expected to continue growing. Goldman Sachs predicts that when this happens, bank profits could be reduced by as much as $11 billion (7%). This helps explain reason for the 146-year-old investment bank’s 2016 launch into the P2P space, called Marcus.
Where is P2P now — and what can other markets learn from it?
- The market is less about peers. There has been a noticeable shift in funding sources for loans, with investment funds coming from such institutional investors as hedge funds rather than individuals. LendingClub is listed on the New York Stock Exchange, and many P2P lenders are now referred to as “marketplace lenders.” While competitive rates are available for borrowers, it’s a bit more difficult for individual investors to get involved.
- It’s about good credit — for now. The 2008 regulations and market’s development have resulted in platforms focused on prime and near-prime borrowers (with credit scores over 640). There are signs this is changing. Some P2P sites, such as FreedomPlus, are targeting “emerging prime markets” — that is, those who are building or rebuilding their credit, typically with low FICO scores. While this can open the market up in a good way, it can also see a higher rate of borrower default if credit standards slip too far. The responsibility will be in the hands of the investor and not the general public, but we should consider the responsibility of borrowing needs.
- Keep innovation in mind. In April 2015, LendingClub announced its expansion into car loans and mortgages, as well as a partnership with Google Business Solutions. Peer-to-peer companies are one of the most established developments of fintech, banking and financial services supported by technology. While regulation is important, it should be to foster — not hinder — its development.
The rates are competitive, borrowers are still benefiting from P2P and the products and market are still maturing. As regulations develop with it and the nature of borrowing and investing changes, much of the potential of P2P lending remains to be seen.