Shakespeare gave us some good advice when, in his play Hamlet, he had Polonius tell his son:
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
I agree with this advice. However, if you must obtain a loan or if you'd like to earn a higher interest rate on your savings, you might consider this option.
There are several web sites that match borrowers and lenders. Such a web site becomes the middleman instead of a bank or credit union. Borrowers may find that the interest rate they pay on their unsecured loan is much better than what other sources charge. And, investors (lenders) will find that they can earn much better rates than they might find at banks and credit unions.
The biggest game in town in this marketplace is Lending Club. Let's briefly step through how this works:
Borrowers: Someone who wants to borrow money applies to Lending Club for a loan. Background information is provided that will assist Lending Club in evaluating the creditworthiness of the borrower. A loan can range from $1,000 to $35,000 with a term of 36 months or 60 months. Lending Club will assign an interest rate to the borrower based at least upon:
- FICO score
- Loan delinquencies during the past two years
- Home ownership
- Debt-to-income ratio
- Annual income
- Time with current employer
There are other factors but you get the picture. Current interest rates are 6.03% for the most creditworthy borrower up to 26.06% for the least creditworthy. There are also origination fees that vary depending upon the grade of the loan. Once an application is complete, Lending Club will make the loan available to potential lenders. If lenders decide to lend to you, your loan will be approved. Most likely, you'll be borrowing from many lenders but Lending Club handles all that.
Lenders: A potential lender registers with Lending Club and creates an account with a pool of money in it. Loans are called "notes" at Lending Club. The lender looks at available notes and decides which might be interesting for investment. For a selected note, the lender tells Lending Club how much he or she is willing to lend toward that note. The note stays "open" until enough lenders have agreed to completely fund the note. Often, a lender only lends $25.00 toward an individual note, thereby spreading the risk among many notes. When a note is completely funded, Lending Club notifies all the lenders for that note. The money will be disbursed to the borrower in question and payments by the borrower will commence the following month. There is also a trading platform provided whereby lenders can buy and sell their shares of existing notes from and to one another. As payments are made, they are credited to the accounts of all the lenders involved.
This whole process intrigued me so I tried it it. It has worked well so far. I have only invested $25.00 for each note where I have participated and have stayed with higher quality notes. Even with that investing plan, I still have had one note charged off, meaning that I lost most of my $25.00 for that note when the borrower defaulted. My net rate of return, taking the charge off into account, has been over 5% so far.
This may or may not be right for you. I'm just keeping you informed!
Check out also: