NEW YORK, June 19, 2008
When Bank Says No, Peers Could Say Yes!
Ray Martin On Ins-And-Outs Of "Peer-to-Peer" Loans From One Person To Another
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Play CBS Video Video Borrowing Money Without A Bank Financial adviser Ray Martin tells Julie Chen how to borrow money without going to the bank. It's called peer-to-peer lending and it's taking the business world by storm.
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Ray Martin (CBS/EARLY SHOW)
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E-MAIL US Write To Ray Martin Benefit from Ray's financial wisdom! Seek his help. Ask him questions. E-mail him!
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Special Report Ray Martin's Money Tips The Early Show money maven offers advice to keep your financial house in order.
One that's becoming more and more popular is the "peer-to-peer" loan, Early Show money maven Ray Martin pointed out Thursday.
Some $647 million changed hands that way last year.
According to Martin, peer-to-peer lending is exactly what it sounds like -- people lending other people money, no banks involved.
However, it's much more formal than you handing your neighbor/uncle/stranger a check. The transaction takes place online, and each Web site offering the service has its own twist.
Some allow potential lenders to "bid" on loans, others focus on formalizing loans between family members.
When you go to one of the Web sites, you can review potential borrowers. Frequently, the folks requesting money include a photo, along with specific details about why they need the money.
After researching borrowers, you select whom you would like to assist, then the Web site takes over.
All of the sites set up legitimate, formal loans. That means you have to provide personal information similar to what you provide a bank when signing for a loan.
Agreements are reached, paperwork is signed, and if the money isn't repaid, the borrower will be handed over to a collection agency, and the failure to pay will appear on credit reports.
Experts predict the $647 million in peer-to-peer loans last year will grow to $5.8 billion by 2010.
Martin says the sudden interest in such loans can be explained in two words: credit crisis. Homeowners who can no longer qualify for a home equity loan, or students who can no longer secure a private school loan, for instance, are looking for alternatives. And borrowing from peers is simply becoming more socially acceptable in this age of eBay and social networking sites, notes USA Today.
Martin observes that many people are borrowing to pay off credit card debt, as well.
Why would anyone want to lend a stranger money?
Basically, there are two reasons, Martin responds: First, there's the opportunity to earn a larger percentage on money than might be earned elsewhere. For instance, on the most popular peer-to-peer site, Prosper.com, you can earn more than 10 percent or more on your investment. In today's market, that might be appealing. Second, many people who use the sites report they like knowing that their money is helping someone else pay off a credit card bill, buy an engagement ring, attend college, etc.
There's another potential benefit of these sites: As mentioned earlier, some specifically cater to families and circles of friends. Lending money to someone you know well can create a tense situation for both parties. Using one of these sites formalizes the process and helps create some distance between emotions and the business at hand.
There's always the risk that someone won't pay the loan back, but there are some precautions in place: Some of the sites won't accept borrowers with sub-par credit scores, others rate borrowers to help prospective lenders asses their credit risk.
The loans probably aren't something someone would want to use a long-term investment vehicle. But if you want to make a smaller investment, want to help someone else, etc., rest assured that there are sites that are run in a businesslike manner and are offering legit services/products.
If you are considering becoming a lender, there are three things you can do to protect yourself:
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- "The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people, until the wealth is aggregated in a few hands, and the republic destroyed." - Abraham Lincoln, November 21, 1864, a letter to William F. Elkins
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- mel130ny
Not necessarily. My son took a loan with a fluxuating mortgage rate. His paymentsd have went fom 800 a month to 2250. He applied for refinancing and was told he didn''t make enough to qualify. He has never missed a payment in three years. I think the bank just wants to keep *** him out of money. - Reply to this comment
- I think I still like the formality of dealing with an corporate entity that''s not as likely to fly into a rage and come to my house to shoot me if I''m late on a payment...
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- we really are going backwards
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- This lending idea has been done for some time among newly arrived immigrants. There was a "business circle" of Southeast Asians (forget which country) who were a mix of successful established businessmen and new arrivals with little chance to get a bank loan. The have-nots would each in turn get a loan from the pool of funds, start a business and pay it back when it worked out. I think it mostly worked out well, but I heard about it when one of the borrowers absconded. I think they even had their own system of enforcement.
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- Interesting..."Some sites won''t accept anyone with a "subpar" credit rating". Wellll, that''s probably why the bank turned them down in the first place. Soooo, I don''t understand the benefit of "peer to peer" lending if the restrictions are that of a bank. Am I missing something here?
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- oladywho, credit card companies are legitamite because they give you little plastic cards with kittens and stuff on them. Mine has a picture of Jesus.
Posted by faith_in_W at 12:18 PM : Jun 19, 2008
The "Dollar Sign" - typical - Reply to this comment
- I see. Thanks for showing me the light. :-)
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- oladywho, credit card companies are legitamite because they give you little plastic cards with kittens and stuff on them. Mine has a picture of Jesus.
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- This is better than a payday loan, where they charge 293% interest on the money you borrow. Thank you CBS. It''s about time people found a way to help each other out.
Now we need some folks who want to start hospitals and health clinics for people who will pay what they can for preventative and some curative methods of health management. C''mon people, we can do more of this if we use our collective consciousness for the betterment of mankind instead of paying CEO''s millions of dollars to figure out creative ways to s#c#r#e#w# many people out of minimal health care.
To faith_in_W: What do you think credit card companies are? - Reply to this comment
- This is called loan sharking and is illegal CBS. HELLLLLOOOOO!
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