Peer-to-Peer Student Loans

In recent years a new type of student loan has evolved: peer-t0-peer student loans. Some of these are loans to students from family and friends. Others are loans cobbled together from strangers. Peer-t0-peer lending companies facilitate these loans. Lenders often get a higher interest rate than they would from a savings account. Borrowers sometimes pay a discount compared to private student loan rates.

Peer-to-peer lending companies are in their infancies, but the Federal Reserve estimates about $89 billion in transactions occur annually between family and friends.

The Lending Club, Virgin's biggest competitor, reports that it arranged more than $22 million in loans for borrowers since launching last year. Borrowers post short profiles on the company's Web site requesting loans, and dozens of lenders can contribute until the loan is funded. Rates range between 7.4% and 19.4% depending on the borrower's credit.

"As the financial crisis becomes deeper and more challenging, even for creditworthy clients, it's hard to get funding," says Renaud LaPlanche, chief executive of Lending Club. "We're streamlining the process between those who have the money and those who need it."

Source: WSJ