Peer To Peer Lending Sites Continue To See Increased Growth In 2011
The peer to peer lending model was born of the belief that traditional banking institutions are charging too much due to many levels of bureaucracy and overhead costs for the institutions. Individuals with less than stellar credit are offered punishing interest rates or denied credit altogether and credit card companies across the board increased credit card interest rates dramatically when the financial crisis hit. Individuals with money saved earn less than 2% annually on their savings. Putting lenders in touch with borrowers through a peer to peer lending network decreased the cost of the loans by reducing overhead costs for funding and increased returns for investors by offering them a much larger share of the profits for funding the loan.
Peer to peer networks became so popular in such a short period of time that it was no surprise that the technology began to be used for personal loans. Peer to peer lending sites, such as Prosper.com, quickly became the ‘eBay’ of credit, allowing borrowers to post their needs on the website and allowing lenders to browse through the site picking loans to find. The attractive interest rates for borrowers and higher yields for investors created a win-win situation that eliminated the need for funding and servicing by traditional banking institutions.
Advocates of peer to peer lending hope that companies like Prosper will eventually release consumers from tedious and complicated credit card terms and the predations of payday loan lenders. The interest rates charged for these loans are determined by supply and demand, with multiple bids on a loan by lenders driving the interest rate lower. This decreases the amount charged for loans to the actual marginal cost of funding the loan.
Over the last year, peer to peer lending companies, such as Prosper, have witnessed the general public’s increasing interest in the peer to peer lending model. Lending activity continues to increase and the default rate is low enough to keep investors interested in funding the loans. The rates of return received by investors are much higher than they would have received from placing their money into a savings account or other traditional saving vehicles.
Challengers of the lending method point out that investing savings in these peer to peer lending companies is far riskier than placing the money in a traditional savings account. This is true, but the rewards for the risk can be more lucrative than these careful savers could imagine. In a calculated two year period, Prosper has delivered an average rate of return of 10.4% and its competitor Lending Club has achieved a 9.65% rate of return on investments.
This is a guest post by Car Finance 247 who are based in the UK and specialise in helping people with bad credit.
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