Peer-to-Peer Lending - Would You?

Money Changing

For a reason I can no longer recall (it's age really, but I don't necessary wish to admit to that), I looked into peer-to-peer (P2P) lending. At the time it was presented as the best thing since sliced bread, only very new and difficult to actually form an opinion about.

Recently I came across it again, so obviously there is a demand that is fulfilled.

The basic idea behind it is as simple as it is old. One person with excess funds lends it to one or more people who are lacking funds. But then bigger. And less personal.

In many Middle Eastern and Asian countries this is known under a variety of names, all coming back to the principle of a 'lending circle'. It’s a pretty active market. Lending circles are run by a trusted person in the neighbourhood who keeps control of the money, and participants pay a set amount per month then take turns borrowing it. They have a predominantly female membership, and experiences in micro finance show that there is a good reason for this. Turns out women are more likely to repay than the males of the species. But let’s not get off on a tangent here...

A bit of peer pressure is obviously part of the process, and don’t forget, everybody knows where you live, which is a pretty strong deterrent for non-payment.

So, back to our Internet based communities. Heralded as new, the concept is not. It’s different though. Borrowers receive a credit rating which is determined by the facilitator’s process, and go on to advertise their requirements - including a reason why they need the money, and the interest rate they are willing to pay. In some cases they also provide some sort of proof on how they are expecting to repay, and some further details such as age and living arrangements. Don’t attract the money you need? Not to worry - re-advertise at a higher rate, or withdraw. The majority of outstanding loan requests appear to be for credit card/debt consolidation or to buy a car.

Lenders can then 'bid' for who they are going to support and that’s where I think the trouble could start. Let’s for a moment assume all borrowers are of same credit quality and they all want to borrow for the same purpose. How do I choose between lending my money to someone who answers to the name smartipants or to cyberhippo? In order to make this decision, I have to have a lot of trust in the underlying organisation, but they’ve not got a track record longer than around five years. And although the number of borrowers has significantly increased in the past year or so, it makes one wonder whether that is not solely the result of current market conditions rather than a better way of finding finances.

Personally, I am not convinced yet and the fact that there is no deposit protection does not help. On the other hand I haven’t totally discarded the idea yet either. Maybe I’ll start my own lending circle. With people I know a bit better than just from reading about them on their profile.