Friday, March 31, 2017

Alternatives to Traditional Credit

Many Americans are still searching for various ways to earn extra money to make ends meet, get out of debt, or buy items they need or want. Some Americans use risky high interest options such as payday loans or debt consolidation, which only leads to more financial problems. Many Americans have bad credit due to unemployment or due to lack of a savings account. This makes it difficult to obtain approval for a loan or credit card. An alternative to traditional lending is peer-to-peer lending, social lending or person to person lending. Borrowers and lenders transact business without using a traditional bank over the internet.

Peer to peer loans can be obtained from several companies such as Zopa, Sofi, Prosper, CircleBack, Upstart and Lending Club. Peer to peer loans offer products similar to banks such as are real estate loans, personal loans, business loans, debt consolidation, loans to pay off credit card debt and more. The average loan amount approved is $7,000. The lenders make money on loan origination fees instead of interest payments so they constantly need repeat or new users. Americans make 6 million peer-to-peer loans a year.

Loans are based on collateral, credit score and personal assets. Owning property and having equity in a property can be used as collateral for a loan. Your credit score has to be at least 620. Your chances of approval are also better if you have some money in the bank. If you default on the loan, you lose your equity and/or your money in the bank.

There are two main types of lending models used the marketplace and the family or friend model. The marketplace model enables lenders to located borrowers and vice-versa. This model connects borrowers with lenders where the lender that is willing to provide the lowest interest rate wins the borrower's loan. The family and friend model is based on borrowers and lenders who already have a business relationship or business co-workers who formalize a personal loan.

Many of the sites password protect their data and are PCI compliant. If a lender suspects that one of their loans belongs to a person who has committed ID theft, they will work with law enforcement authorities to track down and prosecute anyone who has committed identity theft. However, there are risks to the lenders and borrowers both in terms of loan defaults and in terms of fraud.