People have recently adapted to this all-new “online banking” system in which the interest rates are lower than banks, and return rates reach higher than 10%.
The two largest “peer-to-peer” lending firms, LendingClub and Prosper, offer unsecured loans that range from a small amount such as $25 up to $25,000. By doing this they claim that they are bringing back the retroactive methods of lending and borrowing, before banks became involved.
In these firms particularly, the lenders are more interested with helping those in need rather than making a “nice return” which is contrary to those who invest in banks.
The reason behind their ability to offer such satisfactory rates is because they do not have “infrastructure costs” such as expansion or the many costs that banks have to comply with. It’s a cost free business. As long as investors make educated decisions as to whom the money should be lent to, which can be achieved by thoroughly reading loan requests.
In this “peer-to-peer” system, borrowers can attain the money they need from several lenders. And lenders can diversify their risk by dividing their investment through several borrowers. A lender can give out a loan as small as $25 to a single borrower while investing in 100 other borrowers.
LendingClub, which owns the majority of shares to the peer-to-peer market, has been able to make a $188.4 million in profit over the last 3 years (Since 2007). Which is the result of the numerous satisfied costumers who invested in LendingClub.
Indra Singhal, a borrower looking for a good fixed-income investment, invested in LendingClub in 2009 after observing the dissatisfactory rates that banks had to offer.
And so far, he’s lent $80,000 to around 1,015 borrowers with a 14% return rate.
“If you compound our growth rate, we’ll be the size of Citibank in three years.” Claims the CEO of LendingClub, Renaud Leplanch.
It's a great idea because there is a low cost and high profit. It's not really risky to creditors because they invest there money in more than one borrower which decreases the probabilities of losing all the money at once. My perspective is that these firms will be tough competitors to the banks in the coming years.
ReplyDeleteThe idea sounds great and tempting. However, security assurances will be the main concern. It has been in practice in some countries with great success stories, specially benefiting middle in local class population group.
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