I want you to look at this post, then I will explain my position (as if you don’t already know)
I once tried peer to peer lending as one of the lenders. I wanted to see if it worked or not. I ‘invested’ $1000 in Prosper. Here is how I remember it working: a person applies for a loan. The application, along with the person’s pertinent financial information (Credit score, income, etc.) is listed. You as an investor can then offer to fund some of the loan. Once the loan is fully funded, the lenders offering the lowest interest rates are the ones who fund the loan. At the end of the bidding period, those people are the ones who ultimately fund the loan. All loans are for 36 months and are unsecured. Example:
Person wants to borrow $3,000.
Person A agrees to loan $1000 at 18 percent. Person B $2000 at 18 percent. Now that the loan is fully funded, others can come in and offer to fund it at lower interest. Person C agrees to lend $1500 at 16 percent, then Person D agrees to $2000 at 14%. In the end, the loan funds at 13.4%, with a monthly payment of $101.66. The total of all 36 payments for that $3000 loan is $3,659.79.
I decided to put $1000 into my account to see what would happen. (My first loan was for $50. I was repaid $35 of it) so I added more funds, and I loaned that money out to other people. The interest rates were all sky high, 14 percent or higher, and I didn’t choose a single person with bad credit. All had credit scores that were higher than 650. Two of the three of them had defaulted before the end of the first year. I only got back about $140 of the thousand I had invested.
That was 13 years ago. I have learned a lot about money, business, and finance since then. Now I know why they are charged so much.
Why? Because each and every one of those people had already tried to get a loan through a conventional process, and couldn’t. The reason was that they are all high risk borrowers. If a given pool of people has a 10% risk of defaulting on a loan, a lender has to charge enough interest to cover the cost of servicing the loan, plus enough to cover those who will default. The higher the chances are of default, the higher the interest rates need to be in order to make the loan financially feasible. If you have a 10% chance of defaulting, then the lender needs to charge that 10% to compensate for risk, another percent or two to cover office and other administrative expenses, and some for profit. You are now staring at 14 or even 16 percent.
Make charging interest illegal, then loaning someone money without interest means they might as well set it on fire. All lending will simply stop. I’ve posted on this enough times, that if you still don’t understand it, it’s because you are either obtuse or being deliberately contrary.
There are no opinions on this- it’s a mathematical fact. It’s just how money works.
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