Bank said no? Try a personal lender online

When Betty Cabrera needed $5,000 to move into a bigger apartment, the Tacoma woman didn't hit up family or friends for cash.

She posted an ad on asking for a loan to cover first and last month's rent and moving expenses, and uploaded a photo of herself with her husband and two children "to show that I'm a family person."

Soon after her listing went up, complete with her credit rating and debt-to-income ratio, the bids rolled in, eBay-style. Perfect strangers made online offers to lend her money.

"The more days it went, the lower the interest rate was," Cabrera said.

After a week, her loan, which started at a 13.99 percent interest rate, was bid down to 9.9 percent. A few days later, the money was transferred to her account.

Cabrera, who got a three-year unsecured personal loan, doesn't know who lent her the money or why they did. But she said she'll probably get another loan when it comes time to make some home improvements.

Peer-to-peer lending occupies a tiny fraction of the credit market, but it's gaining in popularity as borrowers and lenders look to bypass banks and credit cards for better deals. Social lending networks are emerging to help borrowers and lenders find each other.

"You cut the middleman out. You're getting a better deal," said Renaud Laplanche, founder and chief executive of Lending Club, which launched as a Facebook application last year before opening to the public in September.

Laplanche said borrowers get an interest rate on an unsecured loan that's 2 percent to 3 percent better than they'd get from banks, and lenders get a return of 10 percent to 12 percent -- better than many investments.

"The sites put the decision-making power in the hands of the individual," said Jean Garascia, an analyst with Javelin Strategy & Research.

Between $300 million and $400 million has been borrowed through peer loans in the U.S., a drop in the bucket of the $880 billion credit market, she said. "It's a relatively small population that's using it right now," she said. "That's not to say it won't change."

Younger consumers and higher-income people are the most likely to use it.

"A lot of it is knowing you have alternative options and not being afraid of the medium," Garascia said.

Ben Gillihan, 31, of Des Moines, likes to read people's "pitch" to find out why they need the money. He tends to lend to people who are trying to consolidate their debt or pay off high-interest credit cards.

"It's fun to read through (the listings) and feel like you're lending to an individual, versus (buying) a CD, which is more impersonal," said Gillihan, who has invested about $6,000 so far in the Lending Club and $1,700 with Prosper. "I can loan to them at 13 or 14 percent. Their credit cards are 20 percent. There's an upside for them, and a rate of return for me, too."

Many borrowers are looking to consolidate their credit card debts and loans, or start a new business. Others want to pay for a wedding, cover medical bills, restore an old sailboat or upgrade their kitchens.

The handful of sites -- Prosper, Lending Club, Zopa, Virgin Money and GlobeFunder -- all offer a slightly different model on peer lending. Virgin cuts out the awkwardness by facilitating loans between friends and relatives. Lending Club sets the interest rates depending on one's credit rating and tries to connect people with shared interests. Zopa, a United Kingdom-based company that debuted last month, allows lenders to buy certificates of deposit from credit unions to help borrowers.

Prosper, the largest in the U.S. with 500,000 members and $100 million in loans, leaves it up to the marketplace to decide who gets funded and at what interest rate.

"It's done by the community itself, so people can get the right prices on both sides," said Chris Larsen, chief executive of Prosper.

Larsen said the arrival of other competitors in recent months validates what Prosper is doing.

"We're all focused on competing with the credit card companies and traditional banks," Larsen said.

People who lend money are looking for something different, he said. They want to do well and get a better return on their investments, but they say, "I also want to feel good about what I'm doing."

David Laub of Mercer Island likes to help people who are trying to get out of high credit card debt because he hates credit cards. As an entrepreneur, he also identifies with those who need money to start their own businesses.

He recently took a pass on a borrower who wanted a loan to pay for breast implants and was skeptical of the retiree who had a $2,000 monthly income but wanted to borrow $25,000.

But he sympathized with a borrower whose car had broken down and who ended up taking out a payday loan to pay for the repairs.

"That person had a job for five or six years, a good credit rating," said Laub, chief financial officer of mobile technology firm Crushorflush.

Laub and Gillihan typically make small loans to many borrowers to spread out their money and reduce the risk of someone not paying.

"There's always the risk of somebody not paying," Gillihan said. But to date, he said, no one has defaulted.

source:http://seattlepi.nwsource.com/money/348102_peerloans21.html?source=mypi