Is Democratic Lending Going to Become the New Norm?
By Ryan Goldsman, CFP®, PAIP®
Close to one year ago, a good friend (who shares a background in the financial industry) told me about a new lending platform. He thought a lot of a service called GoPeer and shared the ins and outs of it with me. It definitely sounded interesting.
Although these types of service have been available for quite some time, they’ve rarely been easy to use given the amount of regulation involved.
After seeing the platform, I decided to give it a try, filling out the appropriate forms and depositing $1,000 into the account. It turns out that large financial institutions are not the only ones who are able to price a loan.
It’s an interesting platform. Those with money to invest are able to decide which loans they want to fund, given the risk and rate of return of each loan. For each offering, a base amount of information provided, including the debt-to-income ratio, the annual income of the borrower, their location (in Canada), the industry in which they’re employed, and a number of other things. In addition, the specifics of the loan are provided which include the amount being requested, the payment frequency, and the rate of interest.
What makes the platform most interesting is the democracy of funding the loan. If those with capital are not satisfied by what’s being offered, then they simply won’t fund it. On the borrower’s side however, they will quickly learn if the rate of interest set for their loan is correct or not. Whether we like it or not, there is a market clearing mechanism that allows buyers and sellers to transact. If neither party is willing to compromise, then the transaction does not take place.
What makes this much more interesting that a traditional lending/borrowing relationship is the ability to partially fund a loan instead of having only one lender set the terms and either accept or reject the loan. Essentially the decision is being moved into the hands of numerous investors instead of one financial institution.
Whether a more democratic approach to funding loans is a good thing or not remains unclear, but at least a portion of the population is willing to give it a try. For the platform to work, both borrowers and savers are required to take a seat at the table. I was happy to do it, albeit with no more than what I was willing to lose.