ConsumerWatch: Peer-To-Peer Loans Offer Alternative To Banks

SAN FRANCISCO (CBS 5) - More and more borrowers are turning to strangers to finance their loans in an emerging trend called peer-to-peer lending.

Taking the banks out of the equation, some consumers are turning to sites like LendingClub.com or Prosper.com to get the money they need from people they don't even know.

Amanda Hanson, like other peer-to-peer borrowers, is using LendingClub.com to help pay off her credit card debt.

"I sort of made the decision that I had to move some debt around and get off the high interest rate credit card," she told ConsumerWatch.

After paying 16% interest on her debt, San Francisco-based LendingClub helped arrange a peer-to-peer loan with a lower interest rate for Hanson at just 6.75%.

According to Lending Club CEO Renaud Laplanche, the process of borrowing between individual lenders and individual borrowers will result in better interest rates than either party could get from a bank.

"Interest rates range from 6% to 27%, but the average [peer-to-peer rate] is 13%," Renaud explained.

Lending Club approves borrowers and allows them to post their loan requests on the website, along with other pertinent information like credit score, employment status, and the reasons money is needed. All posted information is anonymous.

The approval process is selective though. Lending Club says 90% of loan applicants are rejected and only those with a job and a good credit score can qualify. Companies like LendingClub and Prosper make their money by charging a percentage from the lenders and borrowers.

Lenders can then decide if they would like to help fund the loan. Most loans are funded by many investors who typically contribute small amounts-about $25 to $100-so that if the loan goes bad, they don't take a serious hit.

Although not having the bank in the borrowing and lending process can be beneficial, Consumer Counseling Credit Service's Rick Harper said it comes with its own risks as well.

"Any time you go outside the traditional way of lending, you need to be careful as a consumer that you understand exactly what you're getting into," Harper said. Not having a bank involved could increase liability and come with less protection, he added.

For some, however, the risk is worth it.

"Hopefully I'll be out of debt in the next three years," Hanson said.

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