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Internet Loan Sharks: Person-to-Person Lending Online

Posted January 19th, 2010
by Staff

sharksFor thousands of years, if you needed to borrow money from someone you tracked down a friend or relative and asked them for some cash. If you didn’t have a friend or relative that had money (most didn’t) you might go to a moneylender. A moneylender was very often considered the scum of the earth, and names like “usurer” and “loan shark” began to creep up. If there was any possible way to do it, you were better off borrowing from regular folks than you were borrowing from a moneylender.

Things are different today. Banks and loan companies aren’t nearly as predatory as they were four or five hundred years ago. Still, there are some compelling reasons to try to find a person to borrow money from rather than from an institution, not the least of which is that many people just don’t qualify under the lender’s rules.

Enter the Internet. Today, there is a solid and growing marketplace for person-to-person lending online. The basic concept is simple, really. You need a personal loan, and rather than going to a bank or traditional lender you go to an online marketplace that connects personal lenders with those that need to borrow money.

There are a couple of different person-to-person lending models online. One model uses an auction of sorts to connect lenders with the lowest interest rates with a specific borrower. The lenders compete with one another for the borrowers business. This process often involves middlemen who package the loans and resell them.

Another model bypasses the auction type setup. It concentrates on situations where the borrower and lender already have a connection. Maybe they’re friends, or maybe they work together. This type of model serves to formalize the loan between two people. This helps to create an environment in which the money factor is taken out of the relationship.

The point of Internet personal loans is to reintroduce some of that social element that’s gone from today’s centralized banking situation. It allows individuals to control their borrowing or investing, and it does so in a way that avoids much of the infrastructure overhead costs associated with traditional lending.

This phenomenon is growing, and rapidly. In the year 2005, there were around $118 million of these types of loans. That number more than doubled to $269 million in 2006, and more than doubled again in 2007 to $647 million. Some experts project a total of $5.8 billion in personal loans between individuals in 2010.

Photo via floodllama

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