Monthly Archives: December 2011

Auto Financing in Canada on AutoTrader now Provided by CommunityLend.

This began in early 2011.

Every private auto listing on Canada’s largest used car marketplace, AutoTrader.ca includes a financing option provided by CommunityLend.

 

Screenshot of CommunityLend auto financing on AutoTrader.caThe AutoTrader.ca + CommunityLend collaboration includes a contextual financing calculator integrated into the gray price box about halfway down the page.

Canadians are accustomed to shopping for cars based on monthly affordability, rather than total purchase price, after being conditioned by new car manufacturers who have marketed cars that way for more than a decade. Now Canadians can shop private auto listings that way too.

By “every” private listing, they mean every listing in Ontario under $25,000. They will soon expand the program to other provinces, and to higher priced cars & trucks.

To put the scale of this partnership into context, the volume of private auto listings is over $6 Billion per year in Canada. (This does not include used car dealerships, just individual sales.) No one has ever offered a comprehensive financing solution to meet the needs of these car buyers and sellers until now. Another interesting application of social lending in action.

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Zidisha’s Growth and Success is Inspiring!

This is an extract of an interview with Zidisha founder Julia Kurnia.

In the last 2 years, Zidisha has grown considerably. Looking back, how satisfied are you with the achievements?

Two years ago, few believed that low-income individuals in developing countries could successfully participate in a genuine peer-to-peer lending community. The conventional wisdom was that people in remote, impoverished communities would not benefit from or repay loans unless the loans were administered in person by expensive local bureaucracies. As a result, the world’s poorest borrowers pay some of the world’s highest levels of interest and fees – between 35% and 40% is the global average for microfinance loans in developing countries.
Though there are quite a few other microlending websites that allow individuals to fund loans in developing countries, all of them rely on local microfinance organizations to communicate with lenders, create loan applications and collect repayments. In these intermediated microlending platforms, the communication is all one way, so that the borrower is often completely unaware of the lenders who funded his or her loan. And the intermediaries pass on their high overhead costs to borrowers, so that even when loans are financed at zero interest by charitable lenders, borrowers end up paying well over 30% in fees and interest. Such high rates reduce borrowers’ profits, sometimes to the point of making them poorer than they were before they received the loan.

Unlike the postings on other microlending platforms, the loan applications and comments posted on Zidisha’s loan pages are written by the borrowers themselves. This opens the way for dialogue between lenders and borrowers, so that lenders can receive answers to their inquiries about the loan and business directly from the entrepreneur they are funding. At the same time, the direct peer-to-peer connection reduces the administrative cost of loans by automating and outsourcing to borrowers and lenders themselves many of the record-keeping and credit-screening functions traditionally performed manually by local microfinance institutions. As a result, the average Zidisha borrower pays about 8% in annual interest and fees, including interest paid out to lenders. Over the past two years we’ve facilitated over 100,000 US$ in microloans for low-income individuals in four countries. Zidisha borrowers have maintained a repayment rate of 99.5% for ended loans – disproving the notion that the working poor in developing countries cannot be trusted to repay loans without the support of expensive local organizations.

How is the borrower feedback? Are there any suggestions for points to improve?

Last month we completed the first survey of all Zidisha members worldwide. In contrast to lenders, who gave a variety of reasons for choosing to join Zidisha, borrowers were unanimous in citing our low interest rates as the principal benefit of borrowing with Zidisha. Other benefits cited by borrowers included: no forced savings or collateral requirements, flexible credit conditions and repayment schedules, and the fact that Zidisha lenders place trust in their integrity and rewards responsible conduct rather than relying on legal protections alone to ensure repayment. 100% of borrower survey respondents said that they are actively recommending Zidisha to others – and indeed, we have never needed to advertise our platform in order to attract new borrowers.
When asked for suggestions for ways we can improve our service, a majority of respondents proposed the ability to raise larger loans. Zidisha currently limits maximum loan sizes based on amounts applicants have successfully repaid in the past, in order to ensure that they have the ability to repay the loans comfortably. However, some borrowers clearly feel that this loan size limitation policy constrains the growth of their businesses unnecessarily.

Burkina Faso and Indonesia were the latest countries added. Are there plans for expansion in 2012 and what are the criteria to select countries? Do you have staff/volunteers working in the countries chosen?

Yes, we aim to add at least two additional countries in 2012 – likely one in the Americas and one in the Middle East or South Asia. We look at a variety of criteria: income levels, the cost and accessibility of existing microfinance services, internet access, language, regulatory conditions. Another key criteria is the ability to transfer funds to and from borrowers quickly and cheaply, without outsourcing control of financial transactions to intermediaries. In that respect, Kenya’s M-PESA mobile phone-based payment service has really contributed to Zidisha’s success there – allowing us to transact instantly with clients in even the most remote rural locations.

The repayment rate is very high. How important is keeping defaults low to growing a p2p microfinance service? Do you perceive overall risk level in p2p microfinance to be rising or decreasing?

Like any financial service, peer-to-peer microfinance relies on the trust of clients in its integrity – and keeping defaults low is essential to maintaining that trust. If defaults are consistently high, the program’s due diligence and/or incentive structure probably need to be adjusted.
I would say that the overall risk in p2p lending is decreasing: as the industry matures, poorly designed or managed platforms go out of business, and those that remain improve their risk management based on earlier experiences.

Does the Euro crisis in any way impact Zidisha’s business?

The Euro is the home currency of many of our lenders. To the extent that the Euro crisis causes it to depreciate against the US dollar (in which Zidisha account balances are denominated) and against the borrowers’ currencies in which loan values are fixed, it will increase financial returns when these funds are converted back to Euros.

That said, lending with Zidisha is intended to be a philanthropic activity, and most of our members seek to generate social benefits in a way that is financially sustainable. Zidisha loans typically allow economically disadvantaged households to expand their cash businesses to the point where incomes are increased by 150% to 200%. The additional cash is very often invested in the children’s education – both by providing sufficient living income so that teenagers do not need to drop out of school to support their families, and by covering the costs of continued schooling. The return to society from this kind of investment in education of the next generation of the rural poor in developing countries is impossible to quantify. This will continue to be true regardless of currency fluctuations.

A week ago Zidisha got a new design. What is new?

Our new design reflects feedback from the Zidisha community, and the growth of our organization. We opted for a clean, modern style and an uncluttered, simple layout that is in keeping with our values of directness and transparency. The new site is more effortless to navigate, easier to learn and read about Zidisha entrepreneurs, and simpler than ever to make a loan. We’ve also included more social media buttons so that visitors can conveniently share Zidisha with friends and family, and connect with us via Facebook and Twitter.

Zidisha is doing direct p2p lending. Do you think it is likely that there will be a substantial shift from indirect p2p lending (like Kiva does) to a direct model without MFIs in the future?

Yes, I think that is the future of online microlending. As Zidisha has proven that the concept is viable, I’m sure that we will inspire many similar initiatives. I expect to see other organizations – both new start-ups and established platforms – experiment with direct P2P lending across the international wealth divide. This will be a welcome development, generating positive social impact beyond the reach of our organization, valuable learning opportunities for P2P lending and microfinance practitioners, and useful variety for our clients.

What goals does Zidisha have for 2012?

Zidisha’s long-term objective is to become a universally available lending platform, whereby highly motivated entrepreneurs, regardless of geographic location, can access the capital they need to grow their businesses and improve their standards of living, limited only by their own performance and track record of responsible credit repayment. Zidisha’s goal for 2012 is to continue to grow its lending volume, while maintaining quality loans that have a high social impact, high repayment rate, and good communication with lenders.

Zidisha is a great example of the trajectory and growth of the disintermediated lending industry. iSellerFINANCE is looking forward to joining the club in January.


CIVILISED MONEY RAISES 100K THROUGH P2P EQUITY

UK startup Civilised Money has raised 100,000 GBP from 121 individual investors using the p2p equity platform Crowdcube. The investors will own 10% of the funding after the legal process of the funding is completed. The P2P funding was completed in just 9 days, showing the potential p2p equity has in the UK.

Civilised Money plans to offer crowdfunding first and p2p lending in a second step. Katherine Byles of Civilised Money told P2P-Banking.com earlier this week that this is actually the second funding round for the company: ‘We have a first round of crowdfunded investment from ‘The Pillars’ 20 key supporters.‘.

Asked whether the technology is self-developed or licensed, she told P2P-Banking.com: ‘The technology is licensed. We have a one-off revenue share based licence for one of the most powerful and flexible P2P platforms available.  Through the core technology platform we will be able to roll-out a number of products, enabling us to cut the cost of using these – once funds are on the platform moving them between the different products is a simple and fast process.

Asked about the USP as compared with Zopa, RateSetter or Fundingcircle Byles said: ‘Civilised Money will offer all the people-to-people financial services products in one integrated service.  It has launched with crowdfunding. People-to-people loans are coming next. It is developing new products too. Civilised Money is becoming a one-stop-shop for all your people-to-people financial products that create a viable alternative to banks. …

The company has ambitious goals as a quote from information provided in the pitch shows: ‘While its service is not yet available in the U.S., Civilised Money’s plans are to expand from the U.K. to greater Europe, and then eventually to Africa and the U.S. (Civilised Money’s services offered will depend on region, since, for example, crowdfunding equity stakes for startups isn’t yet legal in the U.S.)‘.


Social Lending – Dodge the Banks, Reap the Savings!

You don’t have to be a news hound to realize that the world-wide recession has had a major impact on the market for borrowing and lending money. People everywhere are talking about the difficulties in obtaining traditional financing. In fact, a lot of discussion revolves around how to get money from banks, as if they alone control access to the money you need. And, given the continually rising costs of everything, it’s not enough anymore to consider the short term – you need to consider your long-term borrowing needs as well. Why not discover if your project can be funded before calling off your dreams?

Thankfully, there is more to funding than just the banks. Private lending has always had a soft place in our hearts because it allows regular people to get money, but there are some problems with private lending. You see, private lending is still rather underground, and the public faces of it are controlled by big companies that can be just as aggressive and protective as the banks. You will need to have a lot of documentation and paperwork to even get into these private lending circles — even then, your chances of getting truly funded can be difficult.

That’s where social lending has taken over the private lending niche completely. Instead of worrying that you won’t be able to get the money that you deserve, you can join a social lending network and plead your case. Since you’re a regular person talking to other regular people, you have a lot higher chance of getting your proposal truly funded.

Another point that definitely makes social lending interesting is that you can get funding for a lot of projects that private lenders would normally scoff at. What if you really just wanted to pay all of your debts at one time and then pay back the loan over time? You will usually have a much lower interest rate if you go this way, which makes sense. The best thing that you can do is just try to be as detailed as possible with any proposal that you bring to the social network. Not only will this allow people to see what you’re going through, it will give the lenders on the site the right amount of justification to go ahead and fulfill your proposal.

The time is right, so don’t get delayed — get started with social lending today! iSellerFINANCE is launching in January of 2012. Get on the waiting list now.


Exploring Auction Models for Peer-to-Peer Lending

In the emerging market for peer-to-peer loans, the auction method used can make an important difference to the borrower, says Stanford Graduate School of Business economist Nicolas Lambert. 

The market for real estate loans crashed three years ago and still has not recovered. But another financial market — peer-to-peer lending — has boomed, and was expected to increase to $5.8 billion last year, an increase of nearly 800% since 2007.

Peer-to-peer lending brings borrowers and potential lenders together without the participation of a traditional financial institution. It is also known as social lending, a name that speaks to the perception that it offers a chance for individuals and small businesses that could not obtain affordable financing in the conventional market to get loans at the best possible rates.

But is the reverse auction method, used until recently by Prosper, the largest online peer-to-peer lending group, the best way to deliver that result? That’s the question asked by Nicolas Lambert of the Stanford Graduate School of Business and two colleagues in a research paper.

The answer: It is not. When compared to a competing style of auction known as the Vickrey–Clarke–Groves (VCG) auction, the Prosper auction “can lead to much larger payments for the borrower than the VCG mechanism,” the researchers found. Even when the VCG auction doesn’t perform as well for the borrower, the downside tends to be relatively small.

The paper, “Auctions for Social Lending: A Theoretical Analysis,” was written by Ning Chen, of the Nanyang Technological University of Singapore; Arpita Ghosh, of Yahoo Research, and Lambert, assistant professor of economics.

Prosper, which calls itself the “eBay for Loans,” claims a membership of nearly 1.1 million and has funded personal loans worth $228 million. Until late last year it conducted online auctions in which borrowers created loan listings, specifying the amount of money they want to borrow, and a reserve interest — the highest rate they are willing to pay.

Potential lenders vet the various borrowers for credit worthiness and establish (but don’t divulge) the lowest rate at which they would fund the loan. The auction starts at the lender’s reserve rate (which is known to everyone) and continues as lenders bid lower and lower — in effect, a reverse auction.

Because lenders like to spread their risk, they often are only willing to fund part of a loan, which means that many auctions have multiple “winners,” lenders who will loan the money.

Although Prosper moved away from the auction model after research for Lambert’s paper was completed, the research makes an important theoretical contribution to the understanding of social lending, a growing part of internet-based commerce that has had little academic scrutiny. In fact, the authors believe it is the first paper to analyze the theory behind auction mechanisms used in social lending. Prosper-style auctions are used in other venues, including the sale of online advertising, and by other social-lending sites, which means the work has additional practical value.

Prosper now evaluates the credit worthiness of applicants for new loans, gives them a score, and sets a reasonable interest rate for the loan. Lenders have access to that information and can choose to fund all or part of the loan without an auction.

The company revised its methodology because some prospective lenders and borrowers, perhaps overly excited by the auction, submitted or accepted bids that were significantly out of sync with the credit worthiness of proposed transactions, Prosper founder and CEO Chris Larson, MBA ’91, said in an interview with Stanford Business magazine. The move to a fixed-rate system tripled the company’s closure rate to 90%, he said.

The VCG auction has two essential properties that distinguish it from other auction models:

  • First, it is efficient. Situations are economically efficient if there is a balance between benefit and loss and no one can be made better off without making someone else worse off. In the case of the VCG auction, there is no waste of value, an attractive feature for a system that claims to be social.
  • Second, it is “truthful.” Lenders have an incentive to bid their actual reserve interest rate; that is, the cheapest rate they would be willing to accept. This makes it easy to predict the auction’s outcome, and the optimal bidding strategy is an obvious one to all lenders. In other auction designs, such as in Prosper, lenders typically act strategically and declare a rate often higher than the minimum, in hopes of getting a better deal.

The outcome of the auction Prosper used at the time is determined using the concept of a Nash equilibrium. Bids are at equilibrium when no lender can increase his revenue by changing his bid. But the Prosper auction is not truthful so participants do not know the true reserve rates of the other players. Therefore, the Prosper auction has many equilibria that yield very different auction outcomes, making it difficult to predict exactly how much the borrower ends up paying.

Instead, the analysis yields a range of plausible payments for the borrower — one payment for each equilibrium. The paper shows that in the VCG auction the borrower never pays much more than in the Prosper auction, and in many instances can pay significantly less.

Even so, the VCG model is not used as often as the model suggests.

In a simple VCG auction where there can only be one winner, the highest bidder wins, but the price paid is the second-highest bid. However, the pricing rule becomes much more complex when there are multiple winners, as in the case of social lending. This may explain why social lending companies have been reluctant to use the VCG auction, the researchers said.


Having Trouble Selling Your House? Try Seller Financing.

Seller financing can be a very useful tool in bringing buyers and sellers together to close a deal. Also called owner financing, it can be extremely beneficial to both parties given the proper circumstances. Not only used by the late-night info-commercial creating-wealth-with-no-money-down genre, seller financing is also a very viable mainstream option to help sell real estate.

Seller Financing as “Wraparound” Financing

As a second mortgage, seller financing has typically been used to bridge the dollar gap for a home buyer between the amount of the first mortgage and the down payment that he or she has available. It has also been used as wraparound financing (new financing that wraps around existing financing). But seller financing can also be used in the first lien position. This is more common of large parcels of bare land that conventional lenders have traditionally not financed.

The Benefits of Seller Financing

So, what are the benefits of seller financing? Some of the major advantages include a substantial savings in closing costs for both buyer and seller. The parties also negotiate the interest rate and the repayment schedule, as well as other conditions of the loan. The buyer can request special conditions of the purchase, such as the inclusion of household appliances or even vehicles. Also, the borrower does not have to qualify with a loan underwriter. And, unless negotiated, there are no PMI insurance premiums.

On the seller’s side, he or she will receive a much higher yield on their investment by receiving their equity with interest. The seller could also negotiate a significantly higher interest rate than could be received on other types of investments. A higher selling price is usually obtained as compensation for assisting the buyer with financing. The property could be sold “as is”, thus eliminating the need for costly repairs that conventional lenders would require. The seller screens the buyer for credit-worthiness and the ability to pay, and could also require the buyer to purchase a PMI policy to protect the seller against default. The seller could also choose which security document (mortgage, deed of trust, land sales document, etc.) to best secure his or her interest until the loan is paid.

Seller Financing Disadvantages

Are there any disadvantages? Of course there are. But mostly on the buyer’s side. For one, the buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by or unknown to the seller. The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure. Also, the buyer may not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure that he or she is not paying too much for the property. Of course, all of these problems can be eliminated by negotiating the outcomes into the transaction.

In short, a seller-financed sale can be good, as long as it is good for both parties. The concerns of buyer and seller must be addressed during negotiations. But with a “meeting of the minds”, it can certainly be a win-win situation for all concerned. One big advantage to using the iSellerFINANCE platform is that as a seller, you get to use the proprietary credit scoring engine, iSellerCREDIT which will enable the seller to see a much more comprehensive buyer credit profile than that reported by the big 3 credit bureaus.


Peer-to-Peer Lending Gives New Options to Startups

This post is (not entirely) from Josh McFadden in a story he wrote for UtahBusiness.com

iSellerFINANCE (the part NOT from Josh McFadden, but from me)

While not a classic peer-to-peer platform, iSellerFINANCE will enable much of the same functionality as the leading P2P sites do today – you will be able to sell your goods or services financed over time at an interest rate that you and the borrower agree on and you will be able to see the borrower’s complete credit profile, including all of the personal information they supply. The borrower’s credit profile will be created by our proprietary credit scoring engine, iSellerCREDIT and will include such factors as specific default history and Klout scores, enabling the investors to make a more complete determination as to credit risk. In addition, you as an investor will be able to search, cherry-pick and then purchase discounted Notes that carry very high rates of return.  As differentiated from Lending Club and Prosper, these Notes will remain on our website until they are re-purchased. Again, a disintermediation of the Banking business and another classic application of the Internet. Merry Christmas … we are coming soon.

Here’s Josh’s story:

Sometimes securing a business loan can be a difficult proposition. Banks are often hesitant to lend money to startup businesses or ones with poor credit. If your business finds itself in this situation, don’t fear: there are other options.

A fairly new borrowing option for individuals and businesses is peer-to-peer lending, also known as crowdsourcing, person-to-person lending, social lending or p2p lending. Simply stated, peer-to-peer allows a person or company to borrow money without a banking intermediary.

“This is a great opportunity for an individual or business to get financing for non-traditional loans,” says Brock Blake, CEO of Lendio. “We send a tremendous amount of businesses to use p2p loans—businesses that can’t get approved for traditional loans.”

People seeking peer-to-peer loans sign up on either Lending Club or Prosper as a borrower. The borrower submits an application for the loan, and, if approved, the loan is placed on the website for prospective investors. Peter Renton, publisher of Social Lending Network, says investors typically invest a small portion of many different loans, which helps spread their risk.

The borrower’s loan will stay on the website for a short time—usually up to two weeks. While the loan is on the site, investors are able to ask the borrower questions to help them decide whether to invest in the loan. The borrower’s credit report is provided to investors but no personal information is available.

“As a borrower, you can get hundreds of individuals to loan you a little bit,” Blake says.

During the time the loan request is posted, says Renton, one of four things usually occurs: a borrower cancels the loan and pulls it from the website, the loan is pulled because it fails some part of the verification process, the loan is fully funded, or the loan fails to obtain funding after 14 days.

Micro Investments

Peer-to-peer lending is often a great tool for investors as well, particularly since the process can be much simpler than traditional investments.

“From an investor perspective, peer-to-peer lending allows you to directly invest in other people, thereby completely bypassing the banking system,” Renton says. “Investors simply sign up at Lending Club or Prosper, link to their bank account and then transfer money in.”

Lending Club, for example, offers three investment options: low-, medium- and high-risk loans. Investors can use a tool to choose an average interest rate and select how much money they wish to loan. Investors can also choose loans individually.

The maximum loan amount one can borrow is between $25,000 at Prosper and $35,000 and Lending Club.Renton says small businesses looking to expand are among those that most often seek these types of loans.

And unlike bank loans, one can know quickly—within hours—whether the loan has been approved. For startup businesses in particular, peer-to-peer lending is a viable alternative to bank loans. “They’re pretty efficient,” says Blake. “It’s a good option if you’re not looking to borrow a lot or if you have low or not ideal credit. Sometimes it’s your only option, and one option is better than none.”

Blake says the better credit score a person or company has, the better the interest rate will be. The terms are typically one year to three years, and Renton says the rates are better than those you’d find with a credit card.

Peer-to-peer loans can also be in addition to traditional bank loans, meaning if a business can’t get approved for all the money it needs or wants from a bank, the remaining can be made up from the peer-to-peer loans.

Downsides

Not all companies should seek this lending method. “For companies seeking to raise substantial capital, p2p is not for them,” Renton says. “Also, even though the loan may be used for business purposes, it is still a personal loan so if a business owner has poor personal credit, they would not be a good fit.”

Renton also points out that since peer-to-peer loans are personal in nature, the interest isn’t tax deductible. Further, he says although you may be approved for a loan on the platform at Lending Club or Prosper, you may not get enough investor interest to fund your loan, particularly if your credit is on the lower side. The rates are higher than bank loans but do have a cap.

Still, Blake says peer-to-peer lending is easy to pay back, with automatic payments available. And though they’ve only been in existence for about five years, Blake says they’re growing in popularity and he recommends the method to those businesses that fit the criteria.

“They’re gaining a lot more traction in the marketplace,” he says. “A lot of people are using it. The more resources someone has, the better.”

 


Islam, Hamlet, Planning, Focus, and $3 Million in the Bank!

I saw my good buddy Marci Bracco’s post on my FB page (Marci is a great Publicist – her company is Chatterbox PR – highly recommended) admonishing small businesses to build a strategic marketing plan and to stick to it. And, it got me thinking about how often companies either fail to build a strategic marketing plan or just fail to execute. And why that might be.

In addition to executing my own strategic marketing plan for iSellerFINANCE, I am re-reading Dinesh D’Sousa’s great 2005 novel “The Enemy at Home” wherein he describes the real reasons Islamic fundamentalists and traditionalists hate America. It isn’t because of our freedoms or our democracy, as George Bush seemed to believe, but because we have this bad habit of exporting our values to the rest of the world, which is becoming increasingly Muslim. Those values as the Muslims perceive them are hedonistic, trivial and vulgar, and they are making it very difficult for devout Muslims to maintain any sort of standard of morality. Now, that is their problem, but it raised an interesting thought.

As Polonius says to his son Laertes in Hamlet, “To thine own self be true.” This seems to be the single moral standard of Americans … you know, if it feels right, it must be good. And, while this is something of a mental leap, perhaps this influences our decision making processes across the spectrum. Execution requires a certain discipline which, if you don’t ascribe to certain standards of behavior or morality, is very difficult to achieve. And once on the slippery slope, it is hard to get off.

I mean here you are in the middle of executing your strategic plan and a seemingly new opportunity opens up before you. Do you stop what you are doing and explore this new thing? Or, do you keep your head down and forge onward down the path your plan demands? I think, oftentimes we are easily enchanted by the grass on the other side of the fence, especially when what we are doing might not be working exactly like we want. If you really burned calories in the development of that plan, then unless the market completely disappeared, you must stick to it. As my chief editorial assistant Mimi says, “See the ball. Hit the ball.” And, she’s right. Focus is everything.

It is ironic (at best) that the $3 million we are trying to raise right now was sitting in a bank account a few years ago as I kept 25 expensive SAP consultants on the bench believing that the SAP market would come back. Instead of focusing on keeping the powder dry as my new strategic plan required, I focused on getting those consultants out and billing as that became the shiny object in the distance.

So, I am now going to focus like a laser on watching football and enjoying Christmas.

The whole gang here at iSellerFINANCE wishes you and yours a very Merry and Peaceful Christmas holiday. See you next week.


Hitler Got It Right … Too Bad Congress Doesn’t Get It!

SOPA and all the fools who don’t GET IT!

http://www.youtube.com/watch?v=uvXo4sGB7zM


P2P Lending Ready to Explode in 2012.

No one could doubt that peer-to-peer lending (or P2P Lending) has landed big time in 2010, but it looks as if the best is just about to come.

The U.S. leader Lending Club will issue more than $250 million in loans this year — greater than the last four years combined — for a total of nearly $450 million since inception.  Their last $100 million increment in their total loan portfolio growth came in just 4 months from the period July through November 2011.  Their returns have been stable throughout the market turmoil of the past few years — thanks in part to their focus on prime credit consumers — with an annualized default rate below 3 percent.

Prosper has seen 370 percent year-on-year growth in their business in 2011 lending over $70MM this year and bringing their total to more than $260m to-date , with a default rate of around 5.2 percent. Compared with BofA whose default on credit cards has been at an annualized basis of around 5.98 percent this year, down from a peak of 14.53 percent in August of 2009.

Zopa out of the UK has already lent more than £180 million (U.S.$280m), which means they are now approaching a 2 percent market share of the total UK retail lending market. The impressive thing about Zopa’s achievement is that their default rates are running at just 0.9 percent.

So who are lending from P2P lending networks?

If you believe the propaganda from the establishment, P2P lending is risky and only offers opportunistic financing to weak credit prospects — those that can’t get loans from traditional players. However, the reality is something entirely different.

The risk profile of P2P borrowers is often grossly overstated, and often the majority are healthy lenders simply looking for a better deal. That’s why P2P defaults are often as good as, if not better than, the majors.

“We can offer low rates in comparison to our banking competitors in part because we focus only on a select subset of customers — the most credit worthy borrowers — and our fair pricing is commensurate with their risk.” Renaud Laplanche, CEO, Lending Club

The P2P lenders have also done considerable work on understanding the behavior of lenders, thus they don’t look just at the credit score (a lagging indicator of a default risk), but also at the future likelihood of a default.

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks” Giles Andrews, CEO, Zopa

These better models are helping P2P to thrive.

Tis’ the season for P2P Lending

There are times like Thanksgiving week in the U.S. where P2P Lending is predictably slower than normal, but there are also times when P2P faces natural growth in demand.

“We’re gearing up for 50% increase in lending in January 2012, now that we’ve proven the viability of our business model.” Giles Andrews, CEO, Zopa

Scott Sanborn, the Chief Marketing Officer for Lending Club says

“We’ve always got a pop in January. Primarily because approximately two thirds of our loans historically are used to settle credit card debt.” Scott Sanborn, CMO, Lending Club

Last week the Federal Reserve released its latest G19 report on consumer credit. Revolving consumer credit increased marginally (0.5 percent) for the first time in September of this year, and that trend has continued in October. Revolving credit card has been on the steady decline since 2008, down from a peak of $972Bn to a low of $790Bn in August of 2011. In 2009, that meant that every month saw a decline of close to $10Bn in revolving credit in the US. That trend has changed course in the second half of 2011 as borrowers return tentatively to credit facilities.

2011-12-14-OutstandingCreditCardDebt.jpg
Revolving Credit has been on the decline since 2008,
but this Christmas is set to rise again (Credit: InsideARM)

Historically, December and January credit card debt always tends to shoot up due to Christmas shopping habits. Online lending around the end of the year has also been steadily increasing due to the primacy of the online channel, so it’s no surprise that as P2P awareness improves that P2P lending is set to rise this Christmas season too. The difference this Christmas, compared with the last 3 years, is that with revolving credit flattening out the spike in January is stacking up to be the biggest in P2P’s short history.

P2P — Maturing or Mature?

The other difference (in the U.S. particularly) is that we’re seeing more sophisticated investors participating in P2P transactions, meaning that there will be an abundance of cash to support the demand for P2P credit. In fact, the major P2P players in the U.S. are seeing institutional investors, high-net worth investors and the like looking to put cash into P2P. Not just to get a higher deposit rate, but to get that rate with only marginally greater risk — if at all.

Players like Zopa, Lending Club and Prosper are anticipating their largest January yet. In fact, this season is likely to be larger than the 2008-2010 lending seasons combined for the P2P market. If anyone had any remaining doubts about the viability of P2P lending, then I think we can put that to bed this season.