Peer-to-peer lenders step into vacuum left by banks

The medical bills from Gary Mousourakis' cancer treatment had grown beyond his ability to pay.

Medicare and supplemental insurance covered most of the $250,000 tab, but the 67-year-old Washington resident still owed several thousand out of his own pocket.

He didn't have the money. Borrowing from friends and family is something he avoids on principle, and going to a bank seemed too burdensome.

Then, his wife found a website offering another path to the money.

“My wife takes care of all of our bills, and she called me one day and she said, ‘I found this on the Internet, and we can borrow money and we don't even have to talk to anybody,' ” he said.

The option was Lending Club, the largest of the online marketplaces in the rapidly growing industry known as peer-to-peer lending. The basic idea is to match people with spare cash to others who need money, without going through a bank.

The industry has thrived at a time when access to credit remains difficult for many borrowers with poor credit or short credit histories.

“The peer-to-peer growth is very rapid,” Yuliya Demyanyk, an economist at the Federal Reserve Bank of Cleveland. “We attribute this type of growth to the benefit that this type of lending provides.”

Borrowers typically can seek loans up to $35,000 by applying anonymously online, where they provide information about their income, employment and other criteria used to evaluate their creditworthiness. Some peer lenders use non-standard measures, such as SAT scores, to evaluate younger borrowers with short credit histories. Then, individuals or institutional investors choose which borrowers to fund, and the money is deposited into the borrower's bank account in days.

The speed with which financing can be obtained, the low cost compared to credit cards and an investor thirst for higher returns in a low-interest-rate environment have fed the industry's growth.

Peer lending accounts for only a tiny portion of the $11 trillion consumer lending market but is gaining ground on traditional lenders such as banks. The amount of money lent by banks to consumers is declining on average 2 percent per quarter, according to a report Demyanyk co-authored. Meanwhile, peer-to-peer lending has grown 84 percent per quarter.

Lending Club has issued more than $5 billion in loans, and its main competitor, Prosper, is on track to hit $2 billion by the end of the year.

Though used for everything from funding home improvements to vacations, most peer loans are used to consolidate high-interest-rate credit card debt, according to lenders.

Interest rates vary from 6 percent to near 40 percent. However, most people with decent credit scores — the average Prosper borrower has a score of 705 — are able to get rates lower than those of credit cards, the Fed report said.

“What's driving the loan growth in the industry is the fact that the American consumer is now realizing that credit cards are a good way to purchase something, but the wrong place to borrow money,” said Ron Suber, Prosper's president.

The popularity of peer lending has grown with the rise of social media. Companies like Prosper have something in common with other virtual-based services like Uber, an alternative to taxis that connects car drivers with riders through a smartphone application.

Both businesses are marketplaces built around the idea of connecting two groups of people “with trust and transparency,” Suber said.

There have been questions about the risks to lenders, but people who have followed the business say default rates are low and the rewards — yields of 5 percent to 8 percent — outweigh the risks.

“It's really attractive to get a yield in the 8 to 9 percent range with almost no volatility,” said Dan Croce of Birchmere Advisors, a Strip District investment manager that has tracked peer lending.

Peer lenders are regulated by the Securities and Exchange Commission as well as state banking departments.

No peer lender is licensed to operate in Pennsylvania, but consumers can access the services. They won't be protected by Pennsylvania law, which has requirements such as a 29 percent cap on interest rates.

“If you're borrowing money from an unlicensed lender, then we as a department, we don't have authority over it,” said Ed Novak, a spokesman for the Pennsylvania Department of Banking.

Loans can be very expensive for borrowers with spotty credit. That can make a bad situation worse for people who can least afford it, said Gail Cunningham, a spokeswoman for National Foundation for Credit Counseling.

“A 40 percent interest rate is certainly one that should be avoided,” she said. “They say that desperate times call for desperate measures, but we want to move forward, and we don't want to dig ourselves a deeper hole.”

Mousourakis said he has had no problems working with Lending Club since borrowing $6,000 to cover medical bills this year. He is paying it back at a fixed rate of 7.69 percent over 36 months.

“It seemed easy,” he said. “When we did this, I was going through chemotherapy, and I didn't want to go to a bank and be sick and listen to these people and talk to these people, when we could basically do this without saying one word.”

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or cfleisher@tribweb.com.