Michelle Ocasio and her brother, Greg Lange, recently started a Milwaukee vending machine business that offers healthier choices.
The pair took out a $5,000 loan to start the company, but it wasn’t through a bank. Great Lakes Healthy Vending was funded through the peer-to-peer lending website Prosper.com.
As banks have tightened lending standards since the Great Recession, consumers such as Ocasio and Lange are turning to growing online financial communities such as Prosper and LendingClub.com, where investors can designate as little as $25 each to a borrower’s loan.
Borrowers can request loans for anything, from consolidating debt to re-roofing a home. Investors’ money is pooled together until the full loan amount is raised. Borrowers can track how much of their loan has been fulfilled online.
Lenders are then paid back with interest over one, three or five years.
About 150 investors contributed to the Great Lakes loan, which Ocasio, 35, and Lange, 33, will pay back at 6.5 percent interest over three years.
Prosper was founded in 2005 when technological advances made it possible to access the electronic payment backbone the banking industry uses, said Prosper co-founder and chief executive officer Chris Larsen.
“The idea here is really to enable people, for all practical purposes, to really be a bank,” he said.
Borrowers present their case for why they should get a loan and investors decide whether to contribute to the loan. Investors can ask public questions of the borrower on the site, like their experience or credit history.
Prosper ranks the risk of each loan on a grade scale, from AA to D. The payback options are one, three or five years.
“Like all investments, safer investments don’t require as much of a risk premium,” Larsen said.
Prosper has now initiated 400,000 loans, he said, and the default rate is at 5.3 percent.
Lydia Hamilton-Monnie, 31, also used peer-to-peer lending to start Boutique Larrieux, a Milwaukee plus-sized designer clothing store. The store, at 717 N. Milwaukee St., opened in March 2010 and has been successful in growing a loyal customer base in the plus-sized niche, Hamilton-Monnie said.
“I actually put together a very extensive business plan and went to the banks to try to get funding,” Hamilton-Monnie said. “None of the banks were really interested in lending to a start-up.”
Instead, she secured a $25,000 loan from both Prosper and LendingClub.com. She will pay them back over three years at about 11 percent interest.
“I am very pleased with how the business is performing,” Hamilton-Monnie said. “We have had massive leaps in terms of sales volume.”
Investors can create a diversified portfolio on Lending Club by giving a small amount of money to hundreds of loans, said Scott Sanborn, chief marketing officer. Similarly, there is a rating system that gives investors an idea of the risk involved.
Borrowers benefit from an instant quote and risk-adjusted lending that’s easily available online. Lenders have the freedom to choose where their money goes and in what increments.
The average Prosper investor spreads $4,000 among 100 different loans in $40 increments. Investors can contribute a minimum of $25 to each loan and get an attractive average return rate of 10.6 percent, Larsen said.
Lending Club has issued more than 30,000 loans since its 2007 founding, and has a default rate of about 3 percent. Return rates average at 9.5 percent.
“We are absolutely not giving loans to people a bank wouldn’t give loans to,” Sanborn said. “We’re really going after the best credit customers who are being underserved by the current marketplace.”
Attorney Amy Salberg, a shareholder at Whyte Hirschboeck Dudek in Milwaukee who focuses on consumer finance law, warned investors about some laws they need to comply with if participating in frequent peer-to-peer lending.
Those who lend to 25 or more personal, family or household loans in a year are subject to truth-in-lending regulations and the Equal Credit Opportunity Act, she said.
“Some peer-to-peer lending platforms do provide protection (to investors) and some don’t,” she said.
Both Prosper and Lending Club operate through Utah-based WebBank, which serves as the loan originator, Larsen and Sanborn said. Those who give money on the sites are investors, while the banks serve as creditors and comply with the applicable laws.
