It’s been so long since installment loans were popular that you might not even know what they are. Historically, they were loans used to pay for something such as a dining room set that had a fixed number of payments (installments) at a fixed interest rate. Once you completed those payments, the loan went away and you owned the dining room set – or whatever.
The one area where the Internet hasn’t helped
For the past decade, we have been able to manage much of our finances online. We’ve been able to use the Internet to manage our checking accounts, buy stocks online, and pay bills. The one thing that we have been unable to do is use it to get an unsecured loan at a competitive interest rate. So, instead, we’ve tended to use credit cards but they come at a cost. And in case you haven’t noticed, credit cards are the only form of loans where interest rates have not declined over the past 30 years.
Banks don’t want to do unsecured loans
Banks are very reluctant these days to do unsecured loans because their underwriting must be done manually and are costly. So they’ve marketed credit cards instead. As a result, bank loans with fixed interest rates and payment terms have just wilted away. So, in effect, our only alternative has been to get an “unsecured” loan in the form of a credit card with its a high-interest rate. This is despite the fact that overall interest rates are at their lowest point in the past two generations.
Bank loans disrupted
The Internet is now changing this and providing benefits to both small businesses and consumers. For example, if you have a good credit record, you could take out an unsecured three-year loan for $5000, $10,000 or even $20,000 via the web. You would not be required to pay credit card interest rates and might, in fact, be able to get that loan with a rate as low as 6%.
How is this possible?
How is it possible for companies to offer unsecured loans with rates this low? It’s because they do all of their underwriting and marketing via the Internet and have much lower costs than banks. This also makes it possible for small businesses to now get fixed-term loans up to $50,000 or higher and at competitive interest rates.
Where to get peer-to-peer loans
These Internet-based loans have become the new “installment” loans because they have fixed rates and fixed terms. The companies that are leading in this area are ones such as Lending Club, On Deck capital and Kabbage.
Even the customer experience for peer-to-peer loans is improving
Not only are interest rate shrinking, but also the customers’ experience with these peer-to-peer lenders is improving. The companies that are Internet-centric have transformed applications for loans into a more efficient, faster and more transparent process. Online access makes the application and approval processes much more streamlined and automated. As an example of this, Kabbage boasts a 7-minute loan turnaround time. If you go to On Deck Capital, you will find clear-cut eligibility requirements. And customers’ experiences with the Lending Club have been so positive it has a Net Promoter score well into the 70s. This is higher than any other type of financial services institution including community banks and credit unions.
This type of lending is called peer-to-peer lending because the loans are made from one company or group of individuals to another and with no third-party such as a bank or credit union involved. It’s already clear the impact that these online lending sites are having. Peer-to-peer, unsecured consumer finance sites such as the Lending Club have tripled in size this past year to $1 billion, which is much faster growth than total credit card debt or small business lending.
To learn more about peer-to-peer lending
If you would like to know more about peer-to-peer lending, watch this short video.
Hope for more of these loans
Consumers should hope the growth in this type of loans continues to accelerate. This could have a major impact on other loans such as student loans. It could even impact mortgages. In fact, peer-to-peer lending is almost sure to have a big impact on almost all American consumers as well as small businesses.
Peer-to-peer lending as a form of debt consolidation
Depending on how much you owe, one of these fixed-interest, fixed-term loans could be a way to consolidate debts. For example, if you’re laboring under $17,000 in credit card debts you’re probably paying an average of 18% or even higher. If you were able to qualify for a loan through a lender such as Lending Club, you could pay off all those loans and be left with an interest rate of 12%, 8% or even better. This should result in a much lower monthly payment and because the loan has a fixed term, you would know exactly when you would be debt-free. Plus, these loans are unsecured, meaning they don’t require you to offer up any sort of collateral. In comparison, if you were to get a homeowner’s equity line of credit, this would also be a fixed-term loan but would require your house as collateral. In short, installment loans are baack and represent a much better way for many consumers to borrow money than high-interest credit cards.
Tips for getting a peer-to-peer loan
- Be realistic in what you ask for – most of the peer-to-peer sites display your credit score. Don’t ask for more than your score would warrant
- Pick the right venue – sites like Kickstarter can be great for creative professionals but if you need the money for personal or business reasons, choose Prosper or Lending Club
- Provide all the details you can – the people who loan through these websites want to know as much about you as possible. Be sure to include any information that would help a prospective lender see that you have the ability to make your payments
- Be sure to spell it out – let perspective lenders know exactly how you will use the money
- Promote your listing – if you have a listing where you are soliciting funds, share it with family members and friends. Don’t forget to use emails and social media to let the world to know about your request for funds. In other words, advertise it.
- Get recommendations – get as many recommendations as possible regarding your character. If you’re looking for money for your business try to get recommendations regarding your vision and business acumen.