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Peer Lending vs Bank Lending

In Uncategorized on May 31, 2011 by thefhpblog Tagged: , , , , , , , ,

What is the difference between a bank and http://www.lendingclub.com?

As I was reading “The Mesh” by Lisa Gansky and considering how technology is allowing people to provide services directly to one another through systems like Zaarly (www.zaarly.com), share or rent expensive or seldom used items, and lend money directly through sites such as http://www.prosper.com and http://www.lendingclub.com, I was struck by a thought: It is probable that few of my friends understand the differences between loans offered by a bank and loans offered by peer lending services.

The difference can be summed up in one word: Leverage.

The bank leverages every one (1) dollar on deposit to lend nine (9) other dollars. Peer to peer lending lend no more than one (1) dollar for every one (1) dollar it receives. We think that the Fed controls the number of dollars in circulation, and to a point they do. They control the source currency. Banks multiply or amplify the cash created by the Fed because the banking laws allow them to lend more money than they have on deposit.
Peer lending does offer some advantages over traditional banking:
Lenders may receive higher interest rates than they get with traditional banks.
Lenders get to choose which loans they fund. Traditional banks lend to those who meet their requirments.
Lenders pay fewer fees than they do with banks. Traditional banks pay interest, but they also charge depositors fees.
Lenders can choose higher reward (interest rates) for higher risk (lower borrower creditworthiness).

With increased potential reward comes increased risk:
Peer Lending deposits are not insured. Bank deposits are insured up to $200,000.
If borrowers default, the peer lender gets his portion of what is left after debt collection fees. In traditional banking, the depositors money is insured.

In other words, Peer Lending has similar risks to other investments: you may lose your investment.

From the borrower side, Peer Lending has benefits and risks as well
Peer Borrowers may be funded with when they would otherwise be turned away from traditional lending institutions.
Peer Borrowers can, in some cases, sell their story to potential lenders.
Peer Borrowers may pay less interest than their credit card rates.
Peer Lending institutions still use credit scores and other metrics to pre-screen borrowers, so if your credit score is lousy, you may still be denied a loan, or you may be paying very high interest rates.
As you create your financial happiness through investment, look and see if Peer Lending or traditional banking or a mix fits your model.

Links: http://www.prosper.com, http://www.lendingclub.com, http://www.mesh.it

Dave Orton, Thought Provoker @ fHp

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Dave Orton values thought and action, he’s a Father who is committed to sharing with his family, friends and others the principles and insights that will bring fiscally responsible change to people and government in the US and around the world. Dave earns his bread as a technology manager and loves reading, learning, public speaking, and writing. ~If not you, then who? If not now, then when?