Crowd Fund Your Credit Card Debt

NEW YORK (TheStreet --Here's the situation. You've unintentionally run up some credit card debt and the interest is so high that it seems like you can't get ahead. Your big bank has no desire to help you out, and you wouldn't dream of asking a friend or family member to help you out of this jam. But what if a crowd of random strangers steps up?

That's exactly the scenario at sites like Prosper.com and LendingClub.com. Borrowers apply for loans and the websites screen the applicants to make sure the lenders will pay the money back. Only 10% get approved, so it's not a layup if you have poor credit, or you can't prove your income. Investors buy notes made up of these loans, then sit back and collect the interest.

This option is welcome news for some consumers who have run out of ideas. The latest Household Debt and Credit report from the Federal Reserve Bank determined that borrowing on credit cards increased $8 billion in the most recent quarter to $668 billion. Fueling the thirst for charging more, available credit limits were also expanded to $2.13 trillion, the highest level since 2009. While the number of delinquencies has gone down, many consumers are worried about rates rising in the coming year as the Federal Reserve has hinted it would begin backing away from its quantitative easing environment. Fear of higher rates makes the desire to consolidate current credit debt to a lower rate very appealing.

Lending Club gives loans that start at a minimum of $1,000 and can go as high as $35,000. The terms are three years for loans under $16,000 and above that it can be either three or five years. It also isn't open in every state. Lending Club does not currently offer Member Loans in Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska and North Dakota. If the borrower has been making payments on time, they could go back for another loan and bring the amount up to $50,000.

LendingClub started in 2007 and has lent $2.2 billion to borrowers and has paid $198 million in interest to investors. The average rate for borrowers is 6.78%, although most of the active listings on Seederalla.com seemed to average between 7-10%. CreditCards.com notes that the average rate for credit card borrowers is 14.95%, so for most consumers, this is a much cheaper rate. On the investor side, Lending Club notes return interest in the range of 5.57%-9.16%. WebBank is the machine behind the wall and it is FDIC-insured.

Prosper claims to be the first peer-to-peer lending marketplace with $590 million in funded loans and 1.8 million members. It offers rates for borrowers between 6.73% to 35.36%, although the average on Seederella.com were in the 6-11% range. The rate is determined by the borrower's credit risk rating. Prosper investors can earn between 5.52% and 12.03% depending on the investors' appetite for risk. Investors can also spend as little as $25 a note. Prosper can lend in 32 states and borrow in 49.

While many of the listings on Prosper are for debt consolidation, there are other categories as well. Consumers can ask to borrow money for starting a business, baby adoptions, wedding loans and even home improvements. The pitch to the crowd includes a quick description from the borrower like, "finishing touches on a full-scale condo renovation (gut rehab) for main residence. Went over the projected budget due to delays as a result of poor management on behalf of the condo association."

Ron Suber, Head of Global Institutional Sales at Prosper said its average client earns over $70,000 a year and has a FICO score over 700. The number one loan is for credit card consolidation with most customers wanting to improve their financial balance sheet. He said the next most popular is a loan for a large purchase like an engagement ring; banks typically aren't willing to lend money for this type of purchase.

Peer lending doesn't slack on the payback. If a borrower misses payments, both lenders have an internal collection group. If that doesn't work, the borrower is sent to an outside collection agency. Even if Prosper went bankrupt, the borrower is still on the hook for the debt to the lender.

According to P2P-Banking.com, volumes are soaring for these peer to peer lenders. They note that Prosper volume is up 114% in July 2013 over July 2012. However, neither company is rolling in the dough. Prosper is still losing money as net losses have grown from $3,257 for three months ending in June 2012 to $15,653 for the same period in 2013. It's a growth company whose expenses are climbing as it goes after more business. Lending Club has also incurred net losses since its inception, losing approximately $4.2 million for nine months ending December 2012.

But losing money doesn't mean that the business isn't promising, Google ( GOOG) took a $125 million stake in Lending Club in May valuing the company at more than $1.5billion. Granted, the transaction was Google purchasing shares from other shareholders, not just giving the company some cash. However, Google is joining noted venture capital firm Kleiner Perkins who invested $15 million last year. Maybe Google sees The Lending Club as something to put in a Google wallet?

Prosper raised $20 million from Sequoia Capital earlier this year, with more expected to come. "Given our growth from $9.5 million in February to $30.3 million in originations in July, there is tremendous interest from large asset managers to invest in Prosper to see it continue to grow," said Prosper's Suber.

From the lender point of view, some question receiving the actual quoted rates of return. If the borrower quits making payments then the lender doesn't receive anything from that note. Both sites recommend lenders diversify across several notes when investing.

Suber also pointed out that the younger generation is less enthusiastic about dealing with big banks. This type of lending is simple and easy and it can be handled completely online.

So, if you need to get control of your credit card debt and your friends and family turn you down - go ask some complete anonymous strangers. Your peers may be willing to lend you the money.

--Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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