Sometimes you have to take matters into your own hands.
At least that's the mind-set of individuals who lend and borrow money from each other online, known as peer-to-peer lending. In this virtual community you may stand a better chance of obtaining a loan for your start-up business or earning an attractive return.
But though based on self-rule, peer-to-peer lending is not without its conditions. Consider the following before you forgo the bank entirely.
-- For borrowers:
Of the half dozen or so companies that facilitate peer-to-peer lending, a few things are standard: You can't borrow more than $25,000 and you must repay the loan within three to five years. The loan also is unsecured, meaning it's not backed up by an asset, such as your home or car.
The interest rate you pay will vary.
Prosper.com, the largest of the sites, uses an auction system: You name the highest interest rate you're willing to accept and lenders bid it down.
LendingClub.com, on the other hand, determines what rate you qualify for and matches you with lenders. At Zopa.com, you borrow money through a credit union but lenders help defray your monthly payment.
No matter which site you go with, remember the following:
-- Mind your credit
Your identity is not revealed to lenders but information about your borrowing history is. In most cases you need a minimum FICO credit score to even qualify (520 at Prosper, 640 at Lending Club and Zopa). Lenders may also see whether you have been late on another loan payment recently or have a high level of debt compared to your income. So the more you can improve your credit standing, the better off you'll be.
-- Do the math
Don't forget to consider origination fees, as much as 3 percent of your loan amount. And shop around. Your peers may bill you less interest than, say, a credit card. At the Lending Club, for example, the average interest rate is 11.5 percent, below the 13.9 percent average for credit cards, according to Bankrate.com. But loans normally backed by an asset, like an auto loan, are another matter. "The [peer] lender can't hold your car title. It's more risk so there will be a higher price," said Jim Bruene, publisher of Online Banking Report, a newsletter that tracks e-banking trends.
-- Get an endorsement
This is no time to be shy. Lenders want to learn about your reason for borrowing the money, as well as your plans to pay it back. Also, anything you can do to make yourself seem like less of a stranger--such as mentioning your membership in a professional group or alumni association--will help.
"Having a social connection makes a lender feel more comfortable," said Renaud Laplanche, founder and chief executive officer of the Lending Club.
-- For lenders:
While borrowers need to present themselves in the best light, lenders' priority is caution.
-- Weigh the risks
Interest rates on a peer-to-peer loan vary depending on the borrower's credit but they can go well above 20 percent. The more risky the borrower the higher the interest rate you can charge. But you also accept a greater chance of never seeing your money again. The average default rate at Prosper, for example, is 4.7 percent overall. But, adds Chris Larsen, the firm's chief executive, "that varies greatly with credit grade."
-- Diversify your investment
Minimize the risk to yourself by divvying up your cash among several borrowers, not just one. At the Lending Club your money must be split up among a minimum of 25 borrowers.
-- Calculate fees
In addition to studying a borrower's risk and diversifying your investment you need to consider fees. In general, providers deduct up to 1 percent from the monthly payment you receive.
If all of this sounds familiar, it should: Lending money to your peers requires just as much consideration as buying stocks and bonds.
"Many lenders have altruistic motives. They want to help someone get out of a payday loan cycle or start a business," Bruene said. "But if someone walks away from your loan it suddenly doesn't feel so good."
E-mail Carolyn Bigda at firstname.lastname@example.org.