Peer-to-Peer Payday Loan Lending
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UPDATED: Apr 4, 2012
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When consumers deposit their money into bank accounts, the bank protects that money and uses it to issue loans to others. In exchange for using consumers’ money, banks pay them with miniscule interest. For a few thousand dollars, the bank usually pays out a couple of cents each month. Only when a consumer has hundreds of thousands of dollars in a bank does that interest payment turn into something substantial.
But what if those who protected our money began offering a way for us to earn more than a fraction of a percent in interest? What if they began offering 5, 10, or even 12 percent interest?
Some institutions are allowing everyday consumers to use their money to fund payday loans. Those who borrow the payday loans then repay their debt a week or two later at double-digit interest rates—most of which is then relayed to the owner of the money lent to that borrower. The peer-to-peer payday loan platform is enabling consumer’s to gather more return on their money that would otherwise just be sitting idle in a bank’s coffers.
While peer-to-peer payday loan lending isn’t common in the United States yet (at least not on the mainstream), it is growing in popularity in the United Kingdom.
The UK is finding peer-to-peer money exchanging websites growing in popularity with each passing day. Consumers with extra cash are naturally drawn to mediums that will provide them with the most return for savings, and traditional financial institutions are beginning to fall behind in this race. They’re simply not meeting that demand, as their interest return is laughable at best and offending at worst.
What’s more is some feel disgusted by the financial industry, as they watch bankers and financing firms grow wealthier and wealthier off the use of consumers’ money. But with this new peer-to-peer payday loan lending service, some consumers may be able to detach themselves from the banks’ hold and instead allow their money to work for themselves.
There’s a Moral Dilemma Though
But this new trend comes with a moral dilemma—at least for some.
Payday loans have long been associated with predatory lending practices, and, as a result, have been condemned and ostracized by consumer advocate groups. The thought of using one’s money to act as a payday lender is too much for some.
“With this, you are essentially becoming a payday lender—and some people may feel uncomfortable with that,” said Justin Modray, founder of the advice website Candid Money, to ThisIsMoney.co.uk.
But Tim Slesinger, the founder of one of these peer-to-peer payday loan sites called The Lending Well, argues that his site’s services are not immoral at all. “We’re not looking to lend to the financially vulnerable,” he said, according to BitterWallet.com. “We want this business to be ethical for borrowers and lenders.”
One measure Slesinger’s business has taken in order to ensure healthy business transactions is the refusal to administer financing to anybody who already has an existing loan they’re paying off.
That’s more than can be said about most payday lenders here in the States.
Will America Follow?
With the creation of the Consumer Financial Protection Bureau (CFPB) it may be very difficult for peer-to-peer payday loans to gain footing here in the United States.
Richard Cordray, the CFPB’s director, has already made his bureau’s position clear on their desire to regulate payday lending to an extent that makes the industry healthy for borrowers and lenders alike. And the peer-to-peer platform would likely make the CFPB’s job difficult, as these services are operated as private businesses, not traditional “lending institutions.”
Then there’s the matter of whether or not the American public would even accept and partake in the service.
Modray emphasized that he does not believe these websites and services should be viewed as an alternative to ordinary savings accounts. Consumers don’t receive the same protections that they do with traditional banks. If a peer-to-peer company goes under, for instance, consumers’ money is not insured like it is at government-approved banks, meaning consumers would lose all of their money.
Compare that to the $250,000 guarantee at all FDIC-insured banks.
But for the gambling sort, peer-to-peer payday loan lending may very well be an attractive avenue to gain large returns on one’s extra cash just sitting idle in a traditional bank’s vaults.