Tulsa World: Getting loans from family more popular

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Getting loans from family more popular

By KATHY KRISTOF Tribune Media Service
Published: 8/9/2009 2:23 AM
Last Modified: 8/9/2009 4:38 AM

As banks continue to tighten the grip on borrowers, Americans are increasingly turning to a timeless source of credit: one another.

Borrowing from relatives is as old as the hills, but today's person-to-person lending, facilitated by Web-based companies, makes loans more formal and accessible.

The market is dominated by three major players — Virgin Money, Prosper and Lending Club — although there are more than a dozen others.

These companies facilitate loans between friends and family by providing loan documents and automatic debits from the borrower's account. They also serve as matchmakers between strangers wanting to borrow and willing to lend.

The way it works varies from site to site, said Curtis Arnold, founder of CardRatings.com and coauthor of "The Complete Idiot's Guide to Person-to-Person Lending."

Virgin Money concentrates on formalizing loans between people who already know each other. If you want to hit up your parents for a mortgage loan, for example, you can get them on a conference call with a Virgin Money representative and talk through the interest rates and terms.

Virgin Money will then write up the paperwork and collect the payments. The cost for the service varies between $99 and more than $2,000, based on the complexity of the loan and how much you have the company do, said Tim Burke, social lending sales manager at Virgin.

If you choose to have it process payments, Virgin Money also collects

a processing fee each time a payment is made.

Virgin Money doesn't dictate the terms — although it will provide warnings if the loan's interest rate is so low that it's likely to trigger tax problems or so high that you're likely to run afoul of state usury laws.

If you don't want to ask a relative for a loan, you'd be better off going to Lending Club or Prosper, Arnold said.

Because the borrowers and lenders don't know one another, there are safeguards built in on both sides. To protect borrowers, lenders are not given access to the borrowers' personally identifiable information. Once lenders agree to fund a certain loan, they're not allowed to back out.

To protect lenders, the sites pull credit reports on each potential borrower and turn away borrowers whose credit scores don't meet minimum standards.

For those who have money to lend, peer-to-peer borrowing represents an investment — albeit a risky one.

"Most of these are unsecured loans, and those are the riskiest," said Bobbie Britting, research director of consumer lending at TowerGroup.

Since its inception in 2006, Prosper has registered a 19 percent default rate, said Chris Larsen, Prosper's chief executive and co-founder. Virgin Money reports that about 5 percent of its borrowers don't pay on their loans either.

"You should ask yourself if you can afford to lose 20 percent of your investment," Britting said. "Lending is inherently risky. You have to be prepared for that."

Contact Los Angeles Times staff writer at Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St. 90012, or e-mail kathy.kristof@latimes.com. By KATHY KRISTOF Tribune Media Service

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