Refinancing and Peer to Peer Lending
Online Peer to Peer Lending (also sometimes called ‘P2P Lending’ or ‘Social Lending’) is one of the best examples of the how the internet can serve as an agent of ‘disintermediation’ (‘cutting out the middle man’ in plain old English!). Online peer to peer lending services use technology to bring people with a bit of spare cash together with prospective borrowers. Potential lenders then bid on possible loans with the peer to peer website offering transfer, administration and debt collection services. The peer to peer ‘industry’ is still is in its infancy but it is already being touted in some circles at the future of personal finance.
It is also speculated that home loans will be the next big frontier for peer to peer lending (currently most loans are personal loans and therefore relatively small) with some services already taking small steps in that direction. In this model a home loan would be split into several parts, each funded by a different lender. The peer to peer service will then act as a central point, paying over the loan and making sure that every lender get his/her money at the end of the month.
On paper peer to peer home loans may seem like an attractive proposition. You may get lower rates and avoid the banks altogether (possibly a bit of an incentive for some!). There is, however, several good reasons why I believe that you should, at the moment at least, steer clear of the tentative peer to peer home loan experiments that are currently popping up all over the internet:
- For most of us taking out a home loan will be the biggest financial commitment that we will ever make. Entrusting it to services that are basically totally ignorant of offering financial services at this level (facilitating small scale personal loans is one thing, home loans worth hundreds of thousands of dollars quite another!) may perhaps be a risk too far.
- There is a huge question about how the activities of peer to peer networks should be interpreted by regulatory bodies like the Securities and Exchange Commission (SEC). On the one hand peer to peer networks are demonstrably not banks since their core business is ‘facilitating’, rather than giving, loans. On the other hand, it can be argued that they perform certain ‘bank like’ functions (i.e. credit scoring, initiating legal financial agreements and acting as conduits for the flow of funds from one individual to another). This question has not been resolved yet and will almost certainly be tested in court over the next few years. I would, again, be very reluctant to place such an important transaction as a home loan with a system of uncertain legal status.
I am convinced that peer to peer lending has its place and it can also be shown that it has helped many people, who would perhaps have been refused by banks, obtain credit. I am just as convinced, however, that the sector will have to grow up a bit more before I would start recommending that people use it for taking out, or refinancing, home loans!