In between Chase Manhattan Bank and Vinny, who will break your legs if you don't repay your loan, lie new and novel online lenders that act more like dating services than banks.
They match people wanting money with others who have money to lend.
The two biggest such 'peer-to-peer' lenders, LendingClub.com and Prosper.com, offer borrowers lower rates than banks, and offer investors a better return than they could get from putting their money in a CD. Both companies are headquartered in the San Francisco Bay area, and both are licensed in most states. Rates and rules for the two are similar.
Chris Larsen, CEO and co-founder of Prosper, calls peer-to-peer lending a throwback to the way small loans used to be made to ordinary people, before credit cards came into wide use. "We've brought back the simple, basic installment loan—the kind you can use for home improvement, debt consolidation, buying a car or paying for school. These are unsecured loans of anywhere from a few thousand dollars up to $25,000, at low fixed rates. The terms aren't tricky. There are no repayment penalties, no 'gotcha' fees."
True, he says, his lenders are, "looking for a nice return." But many bring an attitude to their lending that's different from what one finds at banks: "They're interested in helping other Americans, in impacting other people's lives directly."
While investors' money does not enjoy the FDIC protection it would have at a bank, it enjoys a better than 10% return. Plus, lenders can diversify their risk by dividing their investment, if they want, across hundreds of different loan accounts in increments as small as $25.
At LendingClub, a borrower with a good credit rating can expect to pay an interest rate five percentage points lower than at a bank. CEO and co-founder Renaud Laplanche says what he and Larsen have done is eliminate the middle-man. "By creating a platform where investors can make loans directly to prime consumers, we eliminate the intermediary. Most people don't think of banks as middlemen, but that's exactly what they are: They collect money in CDs and savings and give you a half percent, then turn around and lend it out at 16% or 18% as unsecured credit. The spread goes not so much for profit as to pay for branches and other infrastructure costs." Having no such infrastructure costs, Laplanche can afford to offer borrowers and lenders better terms.
LendingClub, with an 80% share of the peer-to-peer market, is growing at a rate of 10% a month. "We issued $13.5 million in loans in December," says Laplanche, "up from $12 million in November. If you compound our growth rate, we'll be the size of Citibank in three years."
Since its start in 2007, LendingClub has funded nearly $204 million worth of loans and has paid over $15.6 million to its investors.
Borrower John Good, 29, turned to LendingClub out of frustration. Good, owner of Bubbles Galore, a car wash in Davison, Mich., wanted to expand his business by adding a dog washing service. "My wife and I love car washing, but diversification is key."
But when he told his bank about his plan, they told him he was all wet. "They stuck up their noses up at the idea," he said. "Nothing is worse for a business owner who's attempting to bring an idea to fruition than to be told it's terrible and won't work."
All Good wanted was $16,000. "My attitude was, 'Guys, just give me the loan for Pete's sake!'" He looked elsewhere and found LendingClub.