Sep 26, 2008 6:36 pm US/Eastern
Peer-To-Peer Lending Growing In Popularity On Web
NEW YORK (CBS) ―
The reality of tight credit is hitting consumers and small business owners hard, with banks putting a virtual freeze on all types of lending. So where can you turn if you need cash fast?
Well, turns out there's a new type of lending gaining popularity...and sweeping the Web.
They're all people in need of money who've been turned away at traditional banks. So, instead they're looking to you, on the Web for cash. It worked for Marc Matthias who needed $25,000.
"We ended up with over 700 bidders on our loan," Matthias told CBS 2.
It's called peer-to-peer lending and here's how it works:
If you need to borrow, you post your story – why you need the money, what your financial situation is – including net income and monthly expenses, on a site like Prosper.com. Lenders then line up to submit a bid for the loans, which usually go for interest of 10 percent to 16 percent.
"It is in fact, taking off," admits Aron A. Gottesman, Ph.D., associate professor of finance at Pace University's Lubin School of Business.
Matthias and his partner tried to get a loan from his neighborhood bank last year when he decided to open a boutique bakery. "For them to say you're not going to get any money at all was shocking," he says.
Turned down, he thought his dream would flatten like a bad soufflé. But online he found lenders lining up to give him $25,000.
The real icing on the cake?
"You don't require a co-signer and the interest rates are significantly less than if you borrow through a credit card," said Gottesman.
Gottesman says peer-to-peer lending is a blessing for cash strapped consumers, but cautions that for lenders, these loans are often riskier.
"The first kind of risk you face is credit risk or default risk," he says.
Gottesman also cautions a lender's money is not liquid for the life of the loan, which could be years.
Research projects that $5.8 billion in peer-to-peer loans will be made in the U.S. by 2010, an 800% leap from the amount this year.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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