Peer-to-Peer Lending? Credit Unions Do It Better

Lending Club, an online business that operates like a dating service to pair individuals who want to borrow money with people willing to lend it, reports more than 5,000 successful "marriages" worth more than $43 million since its launch two years ago. Credit Union National Association's (CUNA's) Center for Personal Finance reminds borrowers that credit unions remain a better option.

Peer-to-peer lending networks bypass the traditional lending industry by allowing consumers to appeal directly to other consumers for a loan. Peer lenders often can earn more interest lending their money to strangers than they'd earn on conventional investments such as certificates of deposit. Peer borrowers often can get loans at rates lower than banks offer.

Appeals found on peer-to-peer lending networks tend to be personal and emotional, often including photos of kids and pets in an attempt to make their requests for money more persuasive.

Peer lenders respond by offering amounts and interest rates based on their assessments of individuals' personal stories and credit report data that the networks provide. Peer borrowers who appear to be good risks get all the money they want at favorable interest rates. People with less attractive stories and credit histories might have to settle for high rates or no offers at all.

Overall, peer-to-peer networks have about $1.5 billion in loans on the books, a tiny fraction of outstanding bank consumer loans. Should you consider participating in peer-to-peer lending?

"If you have a credit union auto loan, credit card, or mortgage, you already take advantage of the best peer-to-peer network out there," said James A. Hanson, vice president of the CUNA's Center for Personal Finance.

"Ordinary consumers created credit unions more than 100 years ago by pooling their money to make loans to each other," Hanson explained. "Their motive was not profit, but the desire to lend to their peers at better rates than loan sharks and even banks provide."

Credit unions were the first peer-to-peer lenders. If you don't belong to one, you should, Hanson advises, for the significant advantages and safeguards they give members:

• Deposit insurance. Credit union members' savings, from which loans are made, are insured up to $250,000 per individual per account by the National Credit Union Administration, an agency of the federal government. Peer-to-peer lenders have no such insurance protection if a network goes out of business.
• Help to improve creditworthiness. Credit unions, which exist to serve members, go out of their way to help members with poor or new credit histories improve their credit scores and become eligible for better interest rates. Peer-to-peer borrowers are at the mercy of peer lenders' opinions, with no help to improve their chances of getting a loan.
• Professional oversight and other services. Credit union staff are trained to assess loan applications and approve them quickly and efficiently. Loan interest income funds other member services, such as revolving credit (credit cards and home equity lines of credit), checking accounts, debit cards and bill payment services. Peer-to-peer networks are strictly in the closed-end loan business.