Online Lending Clubs Challenge Bank

The Federal Reserve may have slashed the benchmark interest rate to zero percent, but the frozen credit market isn't showing many signs of thawing yet. So more consumers are turning to each other, reports CBS News correspondent Priya David.

Online person to person loans could total almost $6 billion dollars by 2010. For some, it's an unexpected lifeline.

"I needed a one lump sum payment upwards of $16,000," said Rob Ramonas

When Ramonas returned to civilian life from a four-year tour of duty as an Army nurse, a perfect financial storm was waiting.

First, there was a divorce, and then a house in limbo. Then Connecticut's Department of Corrections told Ramonas he owed four years of payments toward his pension. And all that while he was also trying to take care of his two-year-old child.

"I was flabbergasted," Ramonas said. "You know, how do you grab that kind of money all at once?"

Already maxed out at his credit union, Ramonas needed money fast. So he looked online and found LendingClub.com.

"Lending Club is a social lending network, which is an alternative to the banks," says LendingClub.com CEO Renaud LaPlanche. "It's a way for people who have the money to loan to people who need the money."

As major financial institutions stumble or fail completely, online lending sites like Lending Club are on the rise. Since 2005, the amount of their outstanding person-to-person loans has virtually doubled every year, David reports, swelling from $118 million in 2005 to $1.5 billion in 2008.

It works like this: Folks like Ramonas complete a personal loan request online.

"It was one of the easiest things I ever did." Ramonas says.

Once Lending Club approves the loan, lenders, like Howard Rubinstein, can choose to help fund it. In Lending Club, the average loan is for ten thousand dollars at a rate of thirteen percent for three years.

Wary of the turbulent financial markets, Rubinstein has invested thousands of dollars in on-line lending clubs.

"I was just really intrigued at the opportunity to make more money than I could make from CDs in the bank and at the notion of being able to lend without the bank as an intermediary," Rubinstein said. "I've been happy. I think I've made ten percent on my money since February, when I went in."

And hundreds of thousands of Americans are following suit, including Rob Ramonas.

"Once this loan is paid off I will go in there as an investor and make some loans to other people," Ramonas says.

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