WASHINGTON — Steve Lubs was looking to get rid of his $8,000 in credit card debt, but his high interest rate had him bogged down. He tried getting a loan through a bank to pay off the balance but couldn’t find one with an interest rate lower than 12 percent.
That’s when he turned to Prosper, one of several peer-to-peer lending networks that connect people who need a cash infusion with those who have money to lend. About 70 people have pitched in with $100 to $300, totaling the sum he needs to get out of debt, at a rate of 8 percent.
“When it comes to borrowing, it’s a bargain,” said Lubs, an engineer near suburban Columbia, Md.
Rather than turning to the traditional sources of loans — banks, mortgage lenders, credit unions — many cash-strapped consumers are borrowing from friends, family members and even strangers and are getting favorable terms and rates. And people with money to spare see lending it to others as a better investment than socking it away in a low-yield savings account or playing the volatile stock market.
“Worthy borrowers used to have lots of options, but those have dried up,” said Chris Larsen, chief executive of Prosper, where about 780,000 users have exchanged $160 million since the lending network launched 2 1/2 years ago.
Such loans can be risky
Getting a loan isn’t as easy as it once was, as interest rates have climbed and credit standards have tightened. At the same time, demand for loans is rising. High gas and food prices make it harder to save and pay off existing debt. Home-equity lines of credit are harder to come by, leaving many people short on the costs of home improvement and other expenses. Some people also find it difficult to use traditional lending to finance a car or a graduate degree.
As a result, several peer-to-peer lending networks have sprung up, with names like Zopa, Virgin Money and Lending Club. Some, such as GreenNote and Fynanz, offer loans exclusively for students.
But using such networks can be a gamble for both lenders and borrowers. Loans made through some networks are not insured by the Federal Deposit Insurance Corp. Some networks are affiliated with credit unions or banks, which are regulated by the federal government.
Lenders run the risk of losing their investment if people don’t pay them back.
The networks supervise the loan agreements by checking credit histories. But if a borrower defaults on a loan, a lender’s only recourse is to report the borrower to collection agencies. And not all networks are licensed to make loans in all states.
For borrowers, replacing existing debt with a new loan could lead to deeper financial problems. Personal-finance advisers say borrowers could find themselves in a worse financial hole if they use the networks like just another credit card.
Networks help family lending
Carson Evan of suburban Alexandria, Va., used Virgin Money to lend his younger sister $17,000 to pay off her credit cards. With her interest rates, she would have needed 15 years and $70,000 to pay off that debt. Instead, she can repay her brother’s loan over five years at 3 percent.
“I know I could be getting a better return on it someplace else, like the stock market,” Evan said. “But this was the right thing to do.”
Making the loan through Virgin Money took the awkwardness out of lending to a family member, he said. Rather than paying him back directly, his sister writes a monthly check to Virgin Money, which then wires the money to Evan.
“It added an air of legitimacy to it,” said Evan, 29, a software engineer. “It’s better if she’s not writing the check directly to me, to pay back her brother, even though she is.”
John Vyge, principal with Hillebrand Financial Planning in suburban Dulles, Va., said using a social lending network to correctly document a loan between family members or friends can minimize the chances of the relationship being damaged by a disagreement over the terms or repayment.
But he’s still skeptical about the concept of peer-to-peer loans.
“My concern is people are depending on these loans instead of building a sound financial plan, like having an emergency fund,” he said. “People can just use these sites as another credit card to fund a vacation or anything else under the sun.”
