Brother, Can You Spare A Grand?

The latest development coming out of the current financial crisis is that individuals - regular people like you and me - are becoming banks. It's called Peer to Peer Lending. The idea is that the lender's money can earn more interest than if it were in a bank, and the borrower can borrow at a lower rate than if he or she went to a traditional lending institution. When I first heard about it, I knew right away it wasn't for me. I don't want to be a bank. For one thing, where would I get ten tellers to stand around talking while only one teller's window's open?

This kind of lending is becoming big business. Those who tout it say that it's a process in which "everybody wins." As if that's not a large enough red flag, the companies who run these things -- and who take a cut for themselves -- do it on the internet. The borrower and lender never meet, they just communicate online. I don't want to get my finances involved in a system that has the same rules as a porn chat room.

The websites try to create the atmosphere of a community, a club. Prospective lenders don't just consider the financial condition of the would-be borrower. They can use any criteria they want. According to those who have been studying these places, the lender will often decide which person to lend his money to based on that person's interests and hobbies. I don't know much about economics, but I'm not going to fork over my money to somebody just because he collects clocks.

Borrowers don't need to put up any collateral. They're often people who couldn't qualify for a loan elsewhere. One Peer to Peer company only requires that the borrower be a United States resident with a credit score of at least 520, a bank account, and a Social Security number. They don't even have to own a wallet.

So this system allows people whose credit isn't great to borrow money from people who set their own interest rates and make up the rules as far as who qualifies for a loan. Isn't that how we got into this financial mess in the first place?

But even if this thing didn't look like it was a disaster waiting to happen, I still wouldn't want to become a bank. There are too many decisions. Would I have to hire a guard? Should I validate parking? Should I close early on Halloween?

There's another reason why I don't want to get involved in this thing. What happens if the person I lend the money to can't pay it back? I don't have the right kind of personality to chase people for money. I don't want to be seen as the cruel, impersonal bank that's not allowing a mom and dad to buy a birthday gift for their kid. I don't want to see their noses pressed against my computer Windows as they beg for a little more time.

In this digital age, some people feel very close to those they "meet" on the internet. I think that's one of the biggest problems of Peer to Peer "communities." If you're wise, the only circumstance in which you lend money to a friend is if you don't ever expect to be paid back. Otherwise, bad feelings, lost money, and recriminations are bound to follow - even if you have common interests and a "really good feeling" about the other person.

Let's face it. With the exception of governments, banks are probably universally hated more than any other institution. They're seen as heartless, unfair, and as really hard places to find the bathroom. Why would people want to take over those negative feelings? I say we stick with tradition. If we have to hate, let's keep hating the banks instead of each other.

In addition to writing many television shows and columns, Lloyd Garver has also read many books, some of them in hardcover. He can be reached at [e-mail]. Check out his website at lloydgarver.com

Comments

[mbaty]

This is just part of the process of Americans loosening the tether of financial institutions; peer-to-peer lending, bartering, borrowing, sharing, and freeganing...because banks aren't hated for nothing; they're hated because they use deceptive tactics to make money--from those whose money fuels their risky business. And we the people are just taking the power back. After all, if it weren't for friends and family, some of us wouldn't be here. We aren't CEO's after all; we can't expect uncle Sam to bail us out. We have tip jars because we don't get to vote on raising our salaries every year like Congress. Wall Street may be up or down, but I've still got to eat.

[cktirumalai]

HuffPost's Pick

There is this paradox: the people to whom you would gladly lend money and those who would certainly pay it back don't ask for it, and those who wouldn't pay it back are the people who will ask for it. I wouldn't mind if the defaulters put the money to very good use but they are unlikely to.

[LeftRight]

Wow, I won't even borrow or loan with a friend! Much less someone that I not only don't know, but never meet?!

[CLN]

The peer-to-peer lending fad depends on people believing they can "read" their prospective borrowers. The trouble is, with D level credit borrowers, one in two will end up not paying. Professionals who have read credit reports and analyzed them for years get it wrong about as often as they get it right when they try to determine which one of the two will be the right one.
The idea about assuming you will not be repaid is the right one. Don't commit more money to one of these lending communities than you can afford to lose.

[Raven]

"So this system allows people whose credit isn't great to borrow money from people who set their own interest rates and make up the rules as far as who qualifies for a loan. Isn't that how we got into this financial mess in the first place?"

Yep, that's pretty much how we got here.

But guess what? You've been lending your money out to the highest risk folks out there for some time.

Because those banks aren't lending their money. They're lending yours.

And over the last few years, they didn't really care much about the risk. Why should they? Greenspan thought it was all A-okay. And he would know, right?

Peer to peer lending? No worse than the nonsense that's been happening in the real banks.

Of course, that's what happens when you run out the sheriff and throw open the safe. A bunch of crooks come rolling in. The financial institutions have been operating like the wild West for a long time. Only this time, they weren't exactly the good guys. They weren't safeguarding the money.

I want my money in a bank, too.

But I'd really like someone to be making sure the money isn't just going out the back door and thrown into the wind.

You know, like regulation.

Isn't that what we pay taxes for, after all? For the basic infrastructure that makes us such a wonderful society?

[Herrington]

"You know, like regulation.

Isn't that what we pay taxes for, after all? For the basic infrastructure that makes us such a wonderful society?"

A much maligned function of an actual government. Imagine the traction of an argument by bank robbers for the outlawing of safes.