The Federal Reserve is out with a concerning report regarding the peer to peer lending or marketplace lending industry.
Using the strictest definition of P2P lending, where individual investors lend directly to borrowers, the Fed report says P2P lenders have three widely accepted benefits:
1. P2P loans allow consumers to refinance more expensive debt.
2. These loans help build consumers’ credit histories and therefore improve their scores.
3. P2P lending extends credit access to consumers normally underserved by traditional banks.
The researchers compared P2P borrowers and non-P2P borrowers. Their data shows that often P2P lending has had the opposite effects and negatively impacts the finances of its customers. Among their findings:
1. Credit scores of P2P borrowers fall substantially after taking out a loan when compared to peers who did not take out a P2P loan.
2. Loan delinquency rates are more than 50 percent higher for P2P borrowers two years after the loan origination when compared to peers who did not take out a P2P loan.
3. P2P borrowers exhibit a 47 percent increase in credit card balances after obtaining P2P credit when compared to similar non-P2P borrowers.
The Fed report states, “the industry’s rapid growth has the potential to destabilize consumer balance sheets, particularly those consumers thought to benefit the most.” This is a rather harsh assessment of a sector of finance that has been lauded as providing access to credit in a more efficient manner. The report said the alarming growth in defaults resembles the 2007 subprime crisis. The report called for further examination of the online lending sector.