Peer-to-peer (P2P) lending isn’t so much about peers anymore. The possibility of earning eight to 30 percent on loans through financial platforms like Lending Club and Prosper have brought insurance companies, hedge funds, college foundations, foundations, and family offices in search of returns they can’t get anywhere else. Borrowers who use peer-to-peer loans get better rates and faster decisions than banks offer, and lenders get higher returns than they can find on bonds. People often use peer-to-peer loans to consolidate and repay credit cards or student loans; savings compared to credit cards can reach several percentage points.

Banks struggle with unsecured personal loans and small business loans; during the financial crisis many banks cut their loan officers and now they simply do not have the staff or skills to lend small amounts (up to $ 30,000 for individuals or $ 300,000 for companies).

New solutions driven by the P2P economy

Lending Club, which went public in December 2014, rates applicants (who must have a FICO score of at least 660) with its own proprietary software, then assigns an A to G rating for loans ranging from three to five. years, with no prepayment penalty.

“Our proprietary technology automates key aspects of our operations including the borrower application process, data collection, credit adjudication and scoring, loan financing, investing and servicing, compliance regulatory and fraud detection, ”the company said in its SEC 10-K filing.

Many banks direct borrowers to online marketplaces and also participate in funding – in effect outsourcing their loan application and approval process to peer-to-peer lenders.

Peer-to-peer lenders don’t have a network of branches or entrenched bureaucracies to support so they can offer better terms, and they are lightly regulated – until now – because they don’t own any deposits. Lending Club says its users love how the system works and have given it a Net Promoter Score over 70, “which puts us in the high end of customer satisfaction ratings for traditional financial services companies.”

A lender can choose to provide the entire loan or take increments as small as $ 25, so they can spread the risk across multiple loans through small notes. Nick Clements, co-founder of the money management site MagnifyMoney, recommends investing the minimum of $ 25 on at least 250 tickets, and preferably 500, by committing to $ 6,250 or (even better) 12. $ 500 to reduce the risk of P2P investment. He also recommends avoiding loans older than 36 months.

The company even triggered a robot advisor called LendingRobot, which automates peer-to-peer lending for individuals with a fee of 0.45%. The company says it aims to generate higher returns at low risk by combining cloud technologies with machine learning algorithms.

Staff and small BBusiness loans go Mobile

Another recent app to launch is Flange, which looks like a combination of Kickstarter, social media, and peer-to-peer lending.

The mobile app helps individuals borrow from friends and family through an account on Venmo, the free personal payment app that is now part of PayPal. Borrowers create a campaign to raise up to $ 5,000, the interest rate and loan term (up to six months), and invite friends to commit to the goal. Once the goal is reached, pledges are transferred to the borrower’s Venmo account and Ledge handles automatic repayments. The site claims that “with Ledge, there are no complicated payment calculations, and most importantly, no awkward conversations about refunds.”

Square, which developed a small card reader that plugs into the headphone jack of a smartphone or tablet, uses the transactions it processes to offer business loans based on their cash flow – or card flow. A business borrowing $ 10,000 would repay $ 11,000 and the payments would come from its transactions, so at peak times it repays faster and when business slows down it repays slower. PayPal, which also offers a card reader, also offers a similar loan service. Snapcash, the people who brought us disappearance messages through Snapchat, have a person-to-person payment service that uses Square and, most importantly, transfers your money rather than just making it disappear.

Also beware of Facebook Messenger. David Marcus, formerly of PayPal, extended Messenger into a mobile commerce tool that allows merchants to communicate with customers, allows customers to buy from businesses, and allows users to make payments to friends from of their conversation. It has 800 million monthly users and is still in its infancy.

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