SAN FRANCISCO: The Internet is directly connecting investors and borrowers, letting them take banks out of the lending equation and put their money where their hearts and dreams are.

People have lent each other more than $100 million through Prosper.com since it launched in February 2006 and the US website has partnered with SBI Holdings to expand into Japan.

Peer-to-peer lending website Zopa has been operating in Britain since early 2005 and began offering its service in the United States this month.

British entrepreneur Sir Richard Branson bought CircleLending, a six-year-old US Internet company that manages loans between friends and family members, and rechristened it Virgin Money.

Kiva, which arranges for people to make micro-loans to those trying to start businesses in poor countries, was honoured this month with a $100,000 grant from fast-growing on-demand computing company SalesForce.com.

“I think what is really attracting people is that a person can look at somebody’s story and consider circumstances that a bank or institution might not,” said Fiona Ramsey of California-based Kiva.

“There is value humans can place on a story that banks don’t.” Prosper, Kiva, and Zopa feature pictures of aspiring borrowers, who explain why they want the cash.

Scans of Prosper and Zopa revealed reasons including paying off expensive credit card debt, expanding small businesses, re-modeling homes, dealing with medical bills, and starting a “Christian and Clean Comedy Club.”

Interest rates for investors are higher than those at typical savings accounts or bank certificates of deposit.

Meanwhile, rates are bargains for borrowers in comparison to those at credit card companies or institutional lenders.

Peer-to-peer lending is a new-age version of an old-age practice of community members helping each other improve their lives or weather stormy times, according to website operators.

“Peer-to-peer lending has been going on for some time,” Zopa said. “What is new is the ability of the Internet to make it easy to do that with people you don’t already know.”

Zopa feels US investors are steering clear of risk so, in contrast to its London-based service, the firm guarantees lenders will get their money back.

Lenders at Zopa put their money into the equivalent of certificates of deposit, selecting borrowers they want to direct funds to and picking interest rates from pre-set ranges.

Zopa banks on its borrower-screening savvy to minimise losses.

In Britain, where Zopa’s service involves direct loans between people with lenders bearing the risk, the “bad debt” rate is so low it rounds down to zero.

Virgin Money is sticking with the CircleLending model of managing loans between family members.—AFP