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Online Lending Swells

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Individuals do what tight-fisted banks won't.

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Despite the Federal Reserve's many actions to encourage banks to lend, the credit market is still very much frozen. So a growing number of people are turning to one another for loans - online.

It's called peer-to-peer (P2P) lending, and, in some small way, it's filling the gap left by now-defunct financial institutions. Many of the loans are for small businesses, homes and personal expenses, like credit cards and college tuition.

The arrangement often benefits both borrowers and lenders: The former pay lower rates than they would to traditional lenders, and the latter receive better interest rates than they would in a savings account.

Online lending sites like Virgin Money USA and Lending Club are the most popular. Since 2005, the overall amount of outstanding P2P loans has virtually doubled every year, according to a CBS News report, swelling from $118 million 2005 to $1.5 billion in 2008. Online loans could total almost $6 billion by 2010.

Asheesh Advani, chief executive of Virgin Money USA, told the Wall Street Journal that the company's business is booming: Loan volume jumped to $370 million from $200 million in the past 12 months, with most of that increase coming in the past 6 months, he said.

The Lending Club, Virgin's main competitor, launched in mid-2007 and has overseen nearly $25 million in loans. "As the financial crisis becomes deeper and more challenging, even for creditworthy clients, it's hard to get funding," Renaud LaPlanche, chief executive and founder of Lending Club, told the Wall Street Journal. "We're streamlining the process between those who have the money and those who need it."

On The Lending Club's website, borrowers post brief profiles requesting loans, and several dozen lenders can contribute until the loan is filled. The loans, say borrowers who participate, are accessible, organized, and prompt. Rates range between 7.4% and 19.4%, depending on the borrower's credit. The average loan is for 10 thousand dollars at a rate of 13% for 3 years.

Since the company's inception, only 2.6% of loans have defaulted. This fall, The Lending Club registered with the SEC so its lenders can now resell loans they wish to relinquish.

P2P lending is becoming more popular at a time when its services are needed most. Banks have retrenched and are fearful of lending, and thus charge high rates, even to creditworthy borrowers, who are unnecessarily penalized. On the other hand, P2P lending is an enticing option for individuals who are wary of this turbulent economy and see that the return on cash is nil.

Ultimately, social lending is an outgrowth of the social networking age. In fact, one of my friends, Gilad Muth, 26, who is a high-school math teacher, became a lender on The Lending Club last March after he saw it advertised on Facebook. He decided to put $500 in and, happy with how promptly people repaid their loans, and the way in which The Lending Club matched him with borrowers based on his risk preference, he deposited an extra grand 2 months ago.

Rather than invest in the stock market, he expects to get more consistent and reliable returns on The Lending Club, filling the role of a mini-bank himself.
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