Peer-to-Peer Online Lending Is Flourishing

Posted by Andrew Meyer on June 30, 2007

Peer-to-peer online lending is going to do amazing things for entrepreneurs in developing and developed countries alike.

It will provide a new source of funding to people previously seen as unbankable by banks.

For instance, an entrepreneur in India who needs a $100 loan while making only $2 a day is seen as unbankable by most banks. Brick-and-mortar transaction costs on the loan processing and dispersal are so high that they negate any profits the bank might make on the loan’s interest payments. Plus, most low-income entrepreneurs don’t have credit histories.

The story is the same for entrepreneurs in developed countries like the US. Reasons for “unbankable” tag can vary from not meeting banks’ loan size limits to not having credit histories that meet banks’ risk levels.

This leaves a lot of possible entrepreneurs in unfortunate positions.

Peer-to-peer online lending is able to lend to entrepreneurs that standard banks cannot. They can do this because online transactions carry minimal transaction costs, default impact is reduced by breaking the loans into small pieces and there is an added social influence to loan repayment. Plus, they’re able to provide entrepreneurs with alternative credit history building.

I’m going to cover these peer-to-peer lending sites over the next few posts:

Kiva.org
Lending Club
Prosper
Zopa

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