CoLending
CoLending (also called Peer to Peer Lending, Person to Person Lending, or Social Lending) involves financial transactions—usually borrowing and lending but sometimes more complex transactions—between individuals, without the traditional intermediation of a financial institution. In short, lenders get a better return on their loan than they would with a bank, and borrowers get a lower interest rate. It’s a way for people to help each other and save money at the same time.
Currently in the United States there are two main online organizations that assist in the CoLending process: Prosper and the Lending Club. The following information is from Wikipedia.
Lending Club
Borrowers create loan listings by supplying details about themselves and the loans being requested. Lending Club obtains a credit report about the borrower in order to score the loan and assign the appropriate credit grade (A-G) and interest rate. Factors taken into consideration include the borrower’s credit score, credit history, the amount of the loan being requested and the borrower’s debt-to-income ratio.
Lenders enter in personal information including their level of risk tolerance and then either search for loans themselves or use the LendingMatch algorithm to generate a recommended portfolio that takes their risk level and connections with borrowers into account. Lenders must supply at least $25 in loan money to take advantage of the LendingMatch algorithm.
Prosper
Prosper is an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay, and loan buyers, called “lenders,” bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan. Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.
Prosper verifies selected borrowers’ identity and personal data before funding loans and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.
On Prosper, members can create groups based on affinity, geography or other criteria. There could, for example, be a Napa Valley group, whose lenders and borrowers all live in Napa County.
