There has been an increase in consumers using peer-to-peer (P2P) lending sites. These are online clearinghouses where people are matched with investors and receive money to pay off debts, open businesses or fund home improvements.
Prosper and Lending Club seem to be the most popular P2P sites and this year appears to be their greatest year in terms of profit. In the beginning of 2013, Lending Club made more than $480 million in loans to more than 31,000 people in the first 4 months. This is approximately three times more compared to the same period in 2012. Prosper made 20% more than last year resulting in more than $50 million in loans.
These loans come with a fixed rate, and at the end of May, Prosper advertised rates of 6.73% and 35.36% APR.
The big increase in P2P usage comes from individuals who discover the advantages of making use of such loans, however the increase was also geared by professional investors and hedge funds, which started pouring in large sums of money in order to fund the loans while they search for alternative investments with good returns.
Prosper and Lending Club state that they provide consumer loans that traditional banks usually avoid. In fact, they see opportunities in such loans to people who have credit cards with high interest rates. When compared to other unsecured credit sources, for instance credit cards, peer-to-peer loans usually offer better interest rates. In fact, most P2P borrowers use the loans in order to pay off debt at a lower interest rate.
Other common uses of P2P loans include home refurbishments, paying for weddings and also starting up businesses. It has also become quite attractive for small business owners who find themselves facing a tight credit market.