Editor's choice: LendingClub
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P2P lending is a relatively new form of credit that focuses on financing borrowers with their “peers” — small lenders and individuals that earn interest on the money they lend. 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 the leader in the peer-to-peer lending space.
Peer-to-peer lending may not have begun in the US, but it has quickly spread to dominate the personal loan market and is slowly making its way into other markets.
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: Prosper launched in February 2006, 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 offers 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.”
In 2008, the US found itself deep inside 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, 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.
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 by Goldman Sachs.
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.
Peer-to-peer lending may be just over a decade old, but it’s making waves in the banking scene. Although individual lenders are being pushed out by larger lending firms, there are still quite a few P2P lenders that leave room for people to invest in their peers. And for those looking for a loan that doesn’t come from a bank, there are plenty of peer-to-peer options available for you to compare.
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