When peer-to-peer loans first hit the market, they made quite a splash. "Banking without Banks!" crowed The Economist. "Friends with Benefits!" enthused Comstock's. "How to Beat the Bank," added Forbes. Banks were billed as bullies shaking little guys down for their lunch money, and P2P lending was styled as the Revenge of the Nerds. Feel good story of the year.
Too bad it's not true.
The idea behind peer-to-peer loans is this: individual borrowers and lenders connect and deal directly with each other. By cutting banks out of the process, borrowers should get lower interest rates, and lenders earn more interest income. Removing the middleman is supposed to be good for everyone – except the middleman, of course.
Banks and P2P: If You Can't Beat Them, Join Them
It only took about a year for the very institutions that P2P lenders and borrowers set out to sidestep to muscle their way in. Today, small investors are swamped and overwhelmed by big institutions, which have pretty much taken over both US major P2P platforms, Lending Club and Prosper.
According to Forbes, "A new class of institutional lenders have eradicated the peer-to-peer nature of the business." These institutions now account for up to 80-90 percent of money loaned through Prosper and Lending Club. Unable to match the speed and resources of the behemoths, mom and pop lenders no longer have the same access to the best opportunities.
P2P sites are also drawing in some of the biggest Wall Street executives as board members and investors. This has increased the amount of money available to borrowers, and competition for personal loan business has forced profit margins down.
While some analysts see this as a good thing, increasing borrowers' access to funding and bringing prices down, others have expressed concern that the evils which too-big-to-fail banking brought to mortgage lending nearly a decade ago will overrun the P2P sector. Already, institutions are securitizing P2P loans and industry insiders have said that P2P loans will eventually be pooled, hedged and traded on secondary markets.
What this Means for Individual Borrowers
If your reason for choosing peer-to-peer loans is a preference for dealing with individual investors and other "little guys," that rationale no longer holds water. Financial commentators have said that "P2P" is no longer an accurate description of the platforms. "Rather," says Nav Athwal, Cofounder and CEO of RealtyShares, "The peer lender is now the faceless institution with little motivation other than monetary return on investment."
If, however, your reason for applying with a peer-to-peer lender is to get a lower interest rate and / or better loan terms, you may still achieve that end. More competition for your business should improve the offers borrowers receive, whether that competition comes from individual investors or big institutions. You'll probably want to apply with both peer-to-peer platforms and personal loan companies to increase your chance of approval (both P2P sites say their approval rate for borrowers is only about ten percent) and to have more offers to compare.
LendingTree's Personal Loan marketplace allows you to compare offers from multiple competing sources in minutes.