Peer-to-peer lending?

19 August 2009

Suffice it to say this article in the Guardian caught my attention.

Apparently schemes rather like microfinance and powered via nonprofit social networking are starting to crop up here and there, offering people with spare cash the opportunity to lend it out to those with a business idea, in need of cash, etc.  The lending is in small parcels – so if I have $500 to spare, I won’t lend it all to one person – and because the system involved is all person-to-person both overheads and interest rates are very low.  (Though the website itself runs “extensive” background checks on potential debtors.)

From what the article suggests their default rate is something like one-half of one percent, which is on par with microfinance institutions and far below the industry standard for banking, though this particular website has only organized 10,000 loans, so it could just be bold and saavy early adopters.  The innovators admit it would be ill-suited to some sectors of the lending market, especially long-term investments, but if this model proves robust it could be a massive boon to the market, as lower rates of interest (or, to whit, higher trust, if you consider that interest rates are reflective of overhead and the cost of those loans that fail, both of which are necessitated by information asymmetry between lender and borrower) could potentially free up billions in capital for investment.

Worth a look.