Loanio.com P2P Lending First Impressions, $25 Bonus

I recently decided to dip my toes in the peer-to-peer lending waters. Sure, the midst of a credit crunch may seem like a terrible time to get involved in unsecured loans, but I’m taking an optimistic view. Perhaps, given the tightening of credit by banks, this is an ideal time to try some peer-to-peer lending. Time will tell.

A new competitor to companies like Prosper and Lending Club has recently arrived – Loanio.com, which functions in a reverse-auction manner. You can sign up as a borrower, a co-borrower, or a lender. I went with the lender signup. Here’s how it works, essentially:

When you open an account as a lender, you must link an existing checking account to Loanio and transfer in at least $100 (takes several days for the money to show up). Be warned: instead of doing a trial deposit, Loanio will actually deduct a few cents extra from your account as part of the verification process. Once the money finally shows up in your Loanio account (took 6 days for me, but that included a weekend), you will have to verify the “extra” amount that Loanio deducted. Once it’s verified, you are free to bid on loans as you please.

Borrowers and Credit Quality

As with any kind of peer lending service, you must carefully scrutinize the loan in question before you decide to bid. When borrowers sign up at Loanio, they undergo a credit check (Experian) and their credit information is available for lenders to view. Based on their credit/income information, borrowers are given a grade from A+ down to E. I haven’t found any direct information from Loanio as to a minimum credit score allowed for borrowers, but one E-rated borrower that I found had an Experian Vantage Credit Score ranging from 569-603. Ouch.

When I eye potential borrowers, one of the main elements I examine is the delinquency section. Here’s an example credit profile from a D-rated borrower:

Note the two current delinquencies and the twenty-four past delinquencies! Um, I don’t think I’ll be handing this guy one red cent!

On the other hand, here’s the credit profile of a borrower with an A+ ranking:

Yeah, that looks better, though the large amount of revolving credit balance is alarming.

Of course, you’re free to bid on loans that you deem worthy, and I’m going to err on the side of caution. I suspect that many borrowers on peer-lending sites are there because they absolutely could not get a loan elsewhere, so practice due caution. On the other hand, this type of service is greatly helpful for people who simply want to do something like consolidate high-interest credit card debt, and peer lending is certainly a better option than getting a payday loan!

The Bidding Process

Once you’ve found a worthwhile loan, the bidding process is simple. If you’ve ever used an auction service like eBay, you’ll feel right at home. However, instead of bidding up, you bid downward on the interest rate.

The borrower has the first say in setting the interest rate.

You will be asked to provide the maximum rate you wish to pay on your loan during the loan request application process. Thus, while it is probable that lenders will bid your rate down, you should only use a maximum rate you would be willing to pay.

When the loan auction opens to the lenders, the maximum interest rate is displayed, anywhere from 6-30%. As a lender, you choose how much cash you want to bid (usually $50-100), plus the minimum interest rate that you will accept on the loan. Let’s say that you bid on a loan with a set maximum interest rate of 20%. If you place a bid at 16%, your listing will still show as 20% initially. If enough people bid to fund the loan completely, the downward bidding process begins. As more people bid, the rate will lower incrementally, spitting out lenders who bid the maximum amount first. When the auction ends, those still in the game “win” the right to fund the loan. Make sense?

Lender Fees

When you win a loan and the borrower begins the payback process, Loanio will collect a servicing fee of 1%.

Lenders are charged an annual servicing fee of 1%. The fee is accrued daily the same way in which the borrower interest is calculated.

Also note that if the borrower ever has to pay a late fee, that fee is broken up and distributed to the lenders. Loanio receives no cut of the late fees.

$25 Signup Bonus

Opening an account is easy. Just pick a user name, fill in the required information, and answer some general identity-verification questions. There is no “hard” credit inquiry unless you become a borrower and receive a loan.

As I mentioned earlier, the second step is to link your Loanio account to an existing checking account and verify the initial funding amount.

Loanio has a referral system, and new lenders using a referral link will receive $25.

Every time you refer a new borrower who gets a loan, you’ll earn $50.00 and for every new lender referred, you and the new lender will receive $25.00!

My referral link is right here. If you use it to open an account, we’ll both receive $25. Good karma all around. Please note that you must fund one loan ($50 minimum) in order to receive the bonus.

I think that peer lending has a lot of potential, and now may be an excellent time to get your feet wet. Honestly, I’m considering this fun money, and don’t dare invest more than a few hundred dollars for now, at least until I’m much more comfortable with it. I’ll stick to high-quality borrowers as well. I’m willing to forgo the temptation of 30% interest in favor of a more realistic rate and borrows who might actually complete payments on the loan!

My first impression of Loanio? Pretty good overall, though I think it will be better once they start picking up steam. Right now there are a lot of loans that only receive a bid or two and come nowhere near complete funding. I’d love to see some more action. I’d also love to see a reduction in how long it takes to verify your initial funding. Six days for me, wow.

Still, Loanio is the new kid in town right now. Their service has time and (room) for improvement.