Person-to-person lending: how borrowers get better rates

Posted by Rex Dixon :: May 27, 2007 @ 11:27 am

The basic principle of person-to-person lending is very simple: by removing an intermediary in the financing process, direct person-to-person lending helps borrowers get better rates, and lenders get better returns. I will discuss lenders’ benefits in a later post; let’s focus here on the benefits to borrowers.

What exactly do I mean by “removing an intermediary” in the financing process? Well, banks pay up to 5.5% interests to savings accounts, and then lend the money collected through these accounts out to borrrowers, charging borrowers up to 12.5% interest rate on personal loans. The 7% difference goes into paying the banks profits and expenses, like maintaining thousands of branches and mailing promotions and special offers to acquire new customers. Lending Club is a service that lets people borrow and lend money directly with each other, bypass the banks, and save most of that 7% difference. The service operates fully online and includes users authentication, credit check, bank account verification and reporting to the credit agencies.

Lending Club rates start at 7.45% APR for members with a high credit score. Most members will pay between 8% and 12% interest, depending on their credit score and the amount of the loan they are taking: larger loans carry a higher interest rate. Interest rates of 8% to 12% are very attractive rates for “unsecured” loans (i.e., loans not secured by a vehicle or a home). In comparison, the average interest rate banks charge on personal loans is 12.32% , and the average interest rate on credit card balances is 13.82%*.

In addition to being a better financing option, Lending Club also provides a more responsible approach to credit: all loans to and from members are “amortization” loans, with equal monthly installments, meaning that you effectively repay part of the loan every month. This is a more responsible, cheaper, and more predictable way of borrowing than revolving credit cards, which let borrowers make minimum payments each month, with the balance continuing to accrue interest every month.

We truly believe we are doing a civic good here at Lending Club. We’d love to hear your comments!

Rex from Lending Club

*Federal Reserve G.19 weekly survey of commercial banks and finance companies, 4/6/07