Cash-Strapped Consumers Turn To Strangers

Americans looking to borrow money may have difficult time finding a willing lender as companies continue to lose billions from the mortgage crisis.

"Lenders of every kind are tightening their lending criteria," said Lynnette Khalfani-Cox, who calls herself the Money Coach. "Everything has gotten much tougher, credit cards and banks are changing terms for existing customers."

Because obtaining a loan from a bank is becoming less of a viable option, many consumers are looking for other ways to get the cash they need. Some are even borrowing money from complete strangers. Currently, there are many Web sites and clubs online that enable individuals to obtain loans through peer-to-peer lending.

Web sites such as Prosper.com and Lendingclub.com are growing in popularity because they offer better-than-average benefits for borrowers and lenders.

According to figures from November, Prosper.com reports it has facilitated more than in $6.4 million in loans. LendingClub.com, which first launched exclusively for users of social-networking site Facebook, opened up its services to all consumers and has issued 1,053 loans totaling nearly $9 million, according to its Web site.

LendingClub.com founder and CEO Renaud Laplanche says his site has seen an increase in both borrowers and lenders over the last year.

Laplanche said the main benefit for borrowers is the rate -- because lenders are individuals who typically don’t have the same costs or expenses that banks have.

According to Laplanche, the benefit for lenders is a better-than average return -- typically 10 to 12 percent after fees. The current average stock market rate return is 8 to 10 percent a year.

Laplanche said lenders can pick their own borrowers or the site will match them based on two things: the type of loan portfolio they want, and online communities or groups they are associated with. Borrowers with a credit score below 640 will not be approved, according to LendingClub.com.

Prosper.com is more of a Facebook meets eBay type of Web site. It allows borrowers to create a profile that tells their story and includes a photo, the amount of money requested and the loan's purpose.

Prospective lenders then bid in an auction for the loan. Bidders choose how much of the loan they want to cover and they can offer an interest rate. The loan is typically made up from several different bidders offering different amounts of money at different interest rates.

For instance, someone wanting to borrow $100 may get five offers of $25 at different rates. The four bids with the lowest rate would supply funds for the loan."

Considering Peer-To-Peer Loans

Peer-to-peer loans are ideal for people who need cash quickly and have a below-average credit score.

"It can be a good deal if you have a problem with your credit history," said Jason Rich, author of "Dirty Little Secrets: What The Credit Bureaus Won't Tell You". "In some cases you're going to pay a bit more."

Like most financial transactions, Rich warned, “You want to know what you're getting yourself into."

He recommended that prospective borrowers calculate and understand the amount of interest and fees and what the loan payment itself will be.

"You have to do the math and have the ability to pay it back," he said. "It's almost like getting a cash advance on a credit card."

Rich said in some instances consumers may be better off spending 30 to 60 days improving their credit scores and getting a loan through a bank.

An Investment Vehicle

For people interested in lending, they might be looking to get a good return by spreading out small amounts of money over several loans.

Rich recommended looking at a borrowers' debt-to-income ratio and paying attention to the default rate.

"There is risk. There is reward, but you need to know what you're doing," Rich said. "You never want to lend out money you can't afford to lose."

Khalfani-Cox said lenders should check someone's credit score, but they should also look at the fees associated with the loan and the reason for the loan.

"Look at everything in context. (You) can't just exclusively base it on the credit score," she said.

Newer means of getting loans and mortgages continue to pique interest.

"I think people will give this peer-to-peer lending a much closer look, because it can be much easier to borrow in this way," she said.