Individual lenders on peer-to-peer networks may not have the risk-management tools of bankers, but their decisions sometimes bear distinct resemblances to those of many financial services companies.
At Prosper Marketplace Inc., the most notable parallel has been a sharp movement in the past year by lenders away from subrime in favor of prime borrowers.
Chris Larsen, Prosper's co-founder and chief executive officer, said in an interview that the growing use of his San Francisco company's site by people with good credit shows that peer-to-peer lending has become "a better financial option for people with great credit, or prime credit, than what they're finding out there in the marketplace."
Individuals use the site to make three-year unsecured loans, generally at higher interest rates than they might earn by putting their money in savings accounts. Typically these rates are lower than what banks charge for personal loans, which helps the site attract price-sensitive borrowers.
The percentage of prime loans granted in December by Prosper lenders nearly doubled from January (the earliest month for which the company provides data), to 43.5% of the site's volume. The percentage of subprime loans dropped by over three quarters, to 4.5%.
The percentage of loans requested by prime borrowers increased by nearly half, to 12.4%, while the percentage of requests by subprime borrowers fell by about a third, to 41.1%.
Prosper rates borrowers using Experian Inc. credit scores; people with scores of 720 or more are considered prime, those with scores of 600 to 719 are considered near-prime, and those with scores below 600 are considered subprime.
Mr. Larsen said he could not discuss the plan Prosper announced in October to introduce a secondary market for its loans, because the Securities and Exchange Commission is still reviewing it.
Though the vast majority of Prosper's borrowers continue to seek money to pay off credit cards, Mr. Larsen said a growing number of borrowers are coming to his site because banks are turning them down for home equity loans.
Notably, with home values falling and banks become more wary about letting people borrow against their declining equity, "the home equity business has been shut down," Mr. Larsen said, so many people have begun seeking out unsecured, personal loans, and some are turning to Prosper instead of banks.
This month the company started asking applicants for more information about why they want a loan, and Mr. Larsen said he could not quantify how many people have come to Prosper because they cannot get a home equity loan from a bank. He said that Prosper's rates are competitive with what banks charge for personal loans.
Though the lenders and borrowers choose their own rate for each loan made through Prosper, the November average for prime loans was 10.2%.
For many consumers, "it's the first time you've had reasonably priced installment loans," he said.
Bobbie Britting, a senior analyst with the consumer lending practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said that industrywide home equity loan volume fell about 8% last year, to about $968 billion, after increasing steadily for several years.
"The institutions in the last year really just tightened their belts," Ms. Britting said. "There are fewer people now that qualify at the new terms that the lenders are offering."
Borrowers like home equity loans because the terms are often better than those of personal loans, but some people are seeking personal loans because home equity loans are no longer an option, she said.
However, Ms. Britting expects home equity loan volume to rebound this year once the industry's credit concerns begin to fade.
John Donovan, the chief operating officer of Lending Club Corp., the Sunnyvale, Calif., operator of a peer-to-peer lending site, said his company is also seeing an increase in loan applications, though he could not connect the increase to any specific trends in the banking industry.
A lot of Lending Club's borrowers are prime, though that is likely because people with credit scores that are too low are not allowed to request loans, Mr. Donovan said. The site even boasts that it has rejected $66 million of requests from applicants whose credit ratings did not make the cut.
"Ours is a prime platform," Mr. Donovan said. "Anyone who can get a loan on our platform can get a loan through a bank or other sources."
