There was a time, not long ago, when the only individuals who could grant you business loans were friends, relatives, and gentle strangers you met on the street. The circles were small, the qualifications smaller and the returns uneven.
Introduce peer-to-peer loans, which opened up a market of millions of borrowers to an army of lenders with too much cash on hand and too few options to place it. A few years later, LendingClub Corp. (LC LCLendingClub Corp.5. 63 + 0 18% Created with Highstock 4.6.6), LendingTree Inc. (TREE TREELendingTree Inc273. 20 +2. 28% Made with Highstock 4. 2.6), parent of Lending Tree, and privately owned Prosper have now become the largest and best-recognized players in an industry based on determining which borrowers are the best option to return without bothering to secure the loans. (For more information, see: Can’t get a bank loan? Go to your neighbor ).
Loan structure, purchased by IAC / InterActiveCorp (IACI IACIIAC / InterActiveCorp129. 15-0. 27% Created with Highstock 4. 2. 6) – the parent company of Investopedia – split off in 2003 and five years later, is more a streamlined marketplace than a pure peer-to-peer lending service. At the end of the 1990s, the company started the lengthy process of applying for financing – mortgages, car loans, what have you got – and reversing it. It is inefficient for a potential borrower to go to US Bancorp (USB USBUS Bancorp54. 65-0. 42% Created with Highstock 4. 2. 6), Wells Fargo & Co. (WFC> WFCWells Fargo & Co56, 35-0, 23% Created with Highstock 4. 2.6) and several banks in the neighborhood community, where the application is submitted after application. Instead, why not apply once and have the lenders come to the borrower? The result is that borrowers enjoyed monopony power that they could never have bended before. Certainly, a single borrower who wants $ 80,000 for a modest city loan will not turn the industry upside down. But having an organized market of borrowers forced lenders to compete and, as a result, at least as much to lower interest rates as a Federal Reserve ruling. (For more information, see: IAC / InterActive Spinoff’s one-year overview ).
Although it has been around for more than seven years, Lending Tree still has the financial details of a startup. The parent company earned $ 4 million in sales of $ 139 million in the last fiscal year and even that comes with an asterisk. The majority of the profit for the last biennium comes from the sale of the company’s lending activities and has been deposited under discontinued operations.
The eponymous Lending Club invites ordinary people on board as lenders and borrowers. Lending Club was founded in 2007 and keeps it ‘offers creditworthy borrowers lower interest rates and investors a better return’, and stylizes itself as an ‘alternative to the traditional banking system’. “
The company’s board of directors consists of the former CEO of Morgan StaQueequegey (MSMorgan StaQueequegey50. 02-0. 79% Created with Highstock 4. 2. 6), the former president of Visa Inc. (V VVisa Inc111. 36 + 0 34% Created with Highstock 4. 2. 6) and a former US finance minister, among other alumni of the traditional banking system said. Lending Club started in December 2014. To date, the company has funded more than $ 6. 2 billion in loans and has paid $ 600 million in interest. That appears to be a 9.7% return on the surface, but bear in mind that it is calculated by using loans of different installments for the entire life of the company. The vast majority of Lending Club lending customers use the funds to refinance loans and pay off credit cards, thus strongly supporting the relentlessly insolvent population that makes lenders rich. (For more information, see Investing in (and with) Lending Club ). On the other hand, Lending Club takes 1% of what borrowers earn and investors calculates a percentage of every dollar that has been recovered from overdue loans that have been successfully collected. Lending Club charges borrowers anywhere from 6. 03% to 26. 06%, depending on creditworthiness. As a result, the company is trying to eliminate all types of intermediaries, from commercial banks to storefront loans.
With regard to Prosper, which has received $ 2 billion in loans to a quarter of a million borrowers, interest rates are higher than those of Lending Tree across the board, ranging from 6.73% to 35.36%. Prosper also advertises a qualified 8.89% return for lenders, creating a spread that is theoretically sufficient to make a comfortable profit on its person-rich loans of up to $ 35,000. However, Prosper charges a 1% service rate to lenders, calculated annually. The company originally distributed money to anyone with a heartbeat, which resulted in a standard rate of 22%. In 2008, Prosper began to become stricter with its borrowers and the defaults fell predictably.
Disrupt the industry?
Do you also need to convince small peer-to-peer lenders to disrupt a financial sector that, paradoxically, seems to be consolidating into fewer and fewer hands? What do you think about this: in January 2014, according to market capitalization, America’s largest bank banned its employees from borrowing their own money through peer-to-peer services.
The company’s official word was that profit-driven peer-to-peer loans are a competitive activity that involves a conflict of interest. “This came from Wells Fargo, a bank worth $ 289 billion, or about 190 times what the market attaches to Lending Club. At the very least, no one can accuse the old banks of taking this starting form of competition lightly. The bottom -line
Peer-to-peer lending platforms, such as Lending Tree, Lending Club and Prosper, have gained steam by offering borrowers options that go beyond the traditional banking system, more leverage and, often, better rates.