Interest rates are at their lowest levels since 1971, but even people with excellent credit scores are finding it hard to obtain loans from banks more comfortable with lending to companies than to individuals. For a homeowner with an underwater mortgage, or a repentant over-spender struggling with a high APR, refinancing for lower interest can make a difference over the long term. But with banks still cautious, many people are looking elsewhere to make ends meet.
And for some of them, the solution is to get personal.
The concept of peer-to-peer lending is not new. Websites like Kiva.org have been around for years as a means of helping small-business owners in the Third World get the cash they need to create or expand their businesses. But the Great Recession and its aftermath have brought with them a new need, new clients, and several companies to fill the void left by traditional banks and lending institutions.
With peer-to-peer lending, the people determining your fate aren't sitting behind grand mahogany desks in the big bank downtown – they could be your neighbors, your friends, or complete strangers, sitting behind computers down the block or around the world.
Fringe Finance Goes Mainstream
When Fortune 500 ranked the peer-to-peer lending company Prosper as one of the top 500 companies of 2009, the niche industry was deemed an innovation in lending. However, amid SEC inquiries, the industry itself seemed to be on rocky ground. Still, Prosper and its chief competitor, Lending Club, (both located in San Francisco) have continued to grow and thrive. Prosper has seen year-over-year growth of 367%. Lending Club boasts 19 consecutive quarters of positive returns, and was recently named to Forbes' list of America's Most Promising Companies.
While the national average rate that borrowers pay is 11.41%, peer-to-peer lending offers rates starting in the mid-6% range, with 6.74% for Lending Club and 6.59% for Prosper.
These companies are positioning themselves not just as a boon to borrowers, but as a winning choice for investors, whose small bundles of cash might otherwise be earning 1% or less in certificates of deposit or savings accounts. In peer-to-peer lending, the average return is 10.6%. To date, Prosper has handled more than $350 million in loans; Lending Club, $680 million.
How It Works
The process for obtaining a peer-to-peer loan is not unlike the process for obtaining a traditional one, although there's far less paperwork. Aspiring borrowers create a free account on the company's website and fill out a loan application that includes a credit check, requested loan amount, and the reason for the loan. Potential investors build an online portfolio, browse requests, and determine which requests to fund, and in what amounts.
The years since the financial collapse have brought changes to the dominant role of the big banking system, and with them, the rise of creative and alternative ways to pay down debt, plan for the future, and customize short-term, low-interest loans to meet immediate needs. Should the peer-to-peer lending trend continue to grow, short-term loans could be merely the start of a full-fledged peer-to-peer banking system, with a variety of investment and savings products.
The Safest Banks You Can Trust
Need a Loan? Ask a Stranger: The Power of Peer-to-Peer Lending
BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.
KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.
PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).
M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.
U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.
Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.
Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.
Should the niche market continue to grow and become a threat to traditional banks, which are already struggling with an environment different from that of even five years ago, this little fringe business might become the money-lending industry to beat.