IF THE banks won’t lend you money, might a stranger? Probably not, to judge by recent data from Prosper, an American peer-to-peer lending marketplace (a place where people can lend their own money to other people).The website, which lets lenders bid against each other on the interest rates they are prepared to offer to specific borrowers, has seen an increase in demand from subprime borrowers as access to credit has tightened. But lenders have responded in turn. Chris Larsen, Prosper’s boss, reports a sharp drop in the number of subprime borrowers who are getting funded, from just under a quarter of borrowers in September 2006 to a mere 8% last month. Homeownership, which used to weigh positively on a borrower’s creditworthiness, no longer casts such a magic spell.
So far, so like the outside world. But the credit crunch is also reinforcing areas of difference between social-lending firms and the mainstream market. Without the costly paraphernalia of a normal bank (branches, staff and regulatory costs), social-lending marketplaces have always claimed to offer borrowers cheaper credit than they could get elsewhere. That price gap has widened recently as mainstream lenders have hiked their rates and social lenders have largely failed to follow suit. Asheesh Advani, founder of a social-lending business that relaunched under the Virgin Money brand this month, says that its loan volumes have grown rapidly over the past year largely because they are seen as more affordable as credit terms elsewhere have become tougher.
Why aren’t social lenders raising their rates? One reason is that, unlike banks, they are not facing higher funding costs caused by the seizure in money markets. Another clue lies in that word “social”. Mr Advani, whose business is designed to facilitate loans by family and friends, points out that parents tend not to foreclose on mortgages but to restructure them. Even when strangers are involved, lenders are usually not seeking solely to maximise returns. Let’s not get too misty-eyed, though. The relative immaturity of the market may also play its part, says Giles Andrews of Zopa, a British peer-to-peer lending site.
Most intriguing of all is the possibility that social-lending sites do a better job than their mainstream counterparts of assessing risk. Zopa, which takes a stringent approach to credit assessment and will let only prime borrowers onto the site, boasts a default rate of just 0.1%. Prosper, which is more laissez-faire and has a default rate of 3%, provides measures of “social capital”, such as endorsements by friends, that help lenders to judge the risk of a specific borrower.
That sounds promising. The volumes of loans being processed by peer-to-peer marketplaces remain tiny, however. And default rates will rise as portfolios age. But at least the credit crisis has given social lending a friendly pat on the back.