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Peer-to-Peer Lending Catches On With Borrowers, Investors
Lending Club allows investors to choose the borrowers, who must have a minimum FICO score of 660 out of 850. Investors can look at the borrowers' credit score, ratio of debt to income and other factors that banks use to decide to whom to lend. They can invest in as many people as they want, and contribute as little as $25 to each person's loan. The average amount invested is $6,000, spread out among several borrowers, and the average rate is 12 to 13 percent.
Baskervill chose about 125 people, most of whom were trying to consolidate credit card debt.
"At least they have that extra option," Baskervill said. "I think it's pretty neat, and they don't have to go through a whole lot of bureaucracy in order to qualify for a loan."
Other peer-to-peer lending sites operate differently. Prosper allows lenders to bid on the interest rates for borrowers, which results in low-rate loans. Virgin Money codifies loans between friends and families. Other companies specialize in particular types of loans. TuitionU, for example, help students get loans to pay for school.
The sites typically vet borrowers by pulling their credit reports and requiring minimum credit scores. But the loans do not come without some risk. Lending Club's borrowers have a default rate of about 3 percent. Prosper's default rate is about 5 percent. If a borrower misses payments, the sites report them to credit bureaus. Officials at the sites point out that credit card default rates are in the double digits.
Still, Mark Schwanhausser, a research analyst at California-based Javelin Strategy and Research who has studied peer-to-peer lending sites, said investors should be vigilant for signs that borrowers are struggling to repay their loans. "It's not a 'buy it and tuck it away' kind of thing," he said. "I think you want to pay attention."
For Linda Tsang, a 34-year-old lawyer in the District, lending money to people trying to get out of credit card debt seemed safer than betting on the stock market. She spread $1,000 among about 50 people. Each investment was at least $25. Her annual rate of return has been 10.5 percent, which she says she is pleased with. "I'm a fairly risk-averse investor, and I really don't want to play the stock market at all," she said.
The drawback for borrowers is that the loans typically have to be repaid within three years, which means that monthly payments can be high.
Brandon Frazier, 32, a public relations consultant, was aware of that when he borrowed $18,000 to cover expenses from buying a house in Southeast near RFK Stadium last year. But his rate was low enough that he didn't mind. "The repayment level is higher, but you're able to remove that debt quickly," he said.