Lending Club, Prosper Loans and a few other smaller companies have launched a niche lending industry during the last-half decade known as peer to peer lending. These companies have setup marketplaces in which borrowers on their sites can make loans to one another, eliminating banks from the lending process.
Typically peer to peer lending companies such as Lending Club, Prosper and others start out with the borrower. A person will come to one of the company’s websites looking to take out a three-year or five-year unsecured loan. The borrow will complete an application form and the peer to peer lending company will check the borrower’s credit. If the borrower has a credit score of 660 or above and meets certain other requirements, their loan listing will be placed on the peer to peer lending marketplace and a funding process will begin.
After a loan is listed on a peer to peer lending marketplace, other members of the site with investor accounts will be able to browse the loan. The investor will be able to see key credit information as well as see information about the borrower’s employment situation and a description as to why the borrower wants to take out the loan. If they believe that the interest rate that will be charged to the borrow is sufficiently high for the amount of risk they believe they are taking out on the loan, they can choose to fund part of the loan.
Typically a loan to a borrower will be funded by dozens of investors, each investing amounts ranging from $25.00 to $500.00. After the borrower’s loan is fully funded, Lending Club or Prosper will transfer the loan amount to the borrower. When the first payment is due, the company will draft the funds out of the borrowers account, and distribute the payment to investors that funded the loan. After thirty-six or sixty months, the loan will be repaid by the borrower and the investors will, if the borrower meets their commitment, receive their principal back plus interest.
In the event that a borrower does not pay, the peer to peer lending company, whether it’s Lending Club or Prosper, will engage in a collections practice to try to bring the loan back to current. Lending Club has a well-developed collections strategy, but Prosper.com has previously been criticized for not doing enough to collect on delinquent accounts. The percentage of borrowers that default on their loan depends largely on the marketplace because of the differing credit requirements that each site has.
