Peer-to-Peer Lending Poised for More Growth: Fed
Eight years after a lending model that matches individual borrowers with investors started in the United States, growth for peer-to-peer lending is likely to continue for some time.
According to a new paper from the Federal Reserve Bank of Cleveland, peer-to-peer lending has grown rapidly at an average pace of 84% a quarter since the second quarter of 2007.
That’s compared to the total amount of money loaned through bank-originated consumer-finance loans, which has declined, on average, 2% per quarter, the Fed noted. The total amount loaned through bank-originated credit cards has also declined on average 0.7% per quarter.
“Peer-to-peer’s rapid growth may be attributable to two of the benefits it provides. First, it can improve access to credit for individuals who have short credit histories,” according to Federal Reserve Bank of Cleveland researchers Yuliya Demyanyk and Daniel Kolliner.
“Second, it allows consumers to consolidate credit card debt and lower their interest rate more than they could by going through traditional lenders,” they added.
In comparison to bank-originated consumer-finance loans, peer-to-peer loans have performed either similarly or slightly better, the Fed research paper noted.
On average, between the second quarter of 2010 and the first quarter of 2014, 3.2% of peer-to-peer loans were past due compared to 3.7% of standard consumer finance loans. Over this period, peer-to-peer loans had a lower share of poorly performing loans in 10 of 16 quarters.
The Fed found that most peer-to-peer loans are used to consolidate high-interest-rate credit card debt. Citing data provided by Lending Club, a company that arranges peer-to-peer loans, the Fed said 83.3% of peer-to-peer loans are personal one-time loans, most of which are put to use for this purpose.
This may be explained by the fact that interest rates on peer-to-peer loans have been lower than those on credit cards since the first quarter of 2010, according to the authors.
The peer-to-peer market is currently hundreds of times smaller than the consumer finance and credit card markets, the research revealed. However, the data suggested that the peer-to-peer lending market will continue to grow.
One reason is that the supply of funds from investors for such lending has been increasing. Though peer-to-peer lending started as individual investors lending to individual borrowers, institutional investors, such as community banks, have become involved over time, according to the Fed report.
Another reason that peer-to-peer lending is poised to grow further is that demand for such loans has been increasing. Individuals who either cannot get loans from traditional banks or who wish to consolidate their credit card balances at lower interest rates find peer-to-peer lending an attractive alternative.
The authors of the report said peer-to-peer lending emerged first in the United Kingdom in 2005 and arrived in the United States a year later.
Meanwhile, some credit unions and CUSOs have mixed opinions on whether peer-to-peer lending, and its close cousin, crowdfunding, are competitive threats.
Some in the industry have said credit unions should keep an eye on any new players in the marketplace. Other lending leaders say the peer lending models could complement existing loan programs and help manage risk at the same time.
At a June 11 webinar conducted by the SBA on the future of lending attended by CU Times, one of the panelists responded to a question about the impact of peer-to-peer lending and crowdfunding, saying there are viable programs that help entrepreneurs who need an infusion of capital.