Press Enterprise – “I wouldn’t be surprised that if you see the traditional loan sources start to dry up in this economy, more people will go to these person-to-person sites,” said James Van Dyke, founder and president of Javelin Strategy & Research in Pleasanton, which does consulting for the financial services and payments industries. Van Dyke said advances in Web technology, ensuring secure transactions and allowing credit histories of borrowers and lenders to be verified, are shifting the focus of financial decision-making from institutions to individuals.

While the sites are not yet grabbing huge chunks of business from traditional banks, Javelin projects that the demand for social lending services to pay off credit card debt could grow from $38 billion in 2007 to $159 billion by 2012.

Small Loans, Low Interest

Van Dyke said the social sites take on lending amounts that large banks normally wouldn’t deal with because they’re too small, and thanks to competition among prospective lenders on the sites, loans can be obtained at interest rates 3 or 4 percent below those that a bank would charge to the same borrowers with similar credit histories.

Generally, the sites are free to join and make their money through transaction fees, usually 1 to 3 percent, collected from borrowers when loans are initiated.

Chris Larsen, CEO and co-founder of Prosper.com, said about two-thirds of the site’s business is people taking out debt-consolidation loans, mostly due to credit card debt, with the remaining third seeking funds for a small business.

Larsen said potential borrowers who’ve seen their housing values drop can’t tap their home equity any further, and credit card companies are not giving major breaks on rates.

“We’ve seen a huge, dramatic increase (in business) over the last year,” said Larsen, noting the site has more than 600,000 members and has dispensed $130 million in loans since its 2006 debut. He said a Prosper borrower with good credit can get a three-year, fixed-rate debt consolidation loan for as low as 7 percent, and there are no prepayment penalties. Read Full Article