Last week the Federal Reserve indicated that they will be leaving interest rates at or near zero through at least the middle of 2013. Having moved rates to zero at the end of 2008 during the height of the financial crisis this will mean that the big banks will have five years of basically interest free money.
So what have the banks been doing with this money they can essentially borrow at 0%? While there are signs that bank lending is improving we know that banks are still reluctant to lend money to individuals.
The Fed, most economists say, is trying to force investors to move out of cash and U.S. Treasury bonds and into investments that are more productive for the economy. That’s especially true of banks, which are stockpiling Treasurys and not granting much in the way of new loans to individuals.
The problem is that savers, especially retirees, are being caught in the crossfire of the Fed’s battle to revive the economy. Interest rates are being kept well below inflation — a form of what economists refer to, in unusually colorful language, as “financial repression.”
So what are savers to do? With interest rates well below inflation many people are effectively losing money in money market accounts or CD’s. And with the stock market’s wild gyrations in recent weeks investors have been pulling money out of stock mutual funds at levels not seen since 2008. A small number of these people will discover the many benefits of p2p lending.
Now on the borrowers side of things it is really the big banks that are inadvertently supporting p2p lending. Despite banks being able to borrow money at close to 0% it is still difficult for individuals or small businesses to obtain loans. And with real estate prices dropping again the home equity lines of credit, that were so popular for most of the last decade, will not be readily available again any time soon.
The one place individuals can go for a loan, their credit cards, have interest rates that are still high. The average rate, according to Bankrate.com, is currently hovering around 14.42% for variable rate credit cards. And we all know what happens to those variable rates if you miss a payment or have some credit problems.Some of these people are looking online for alternatives and no doubt discovering p2p lending.
The Perfect Storm for P2P Lending
Renaud Laplanche (CEO of Lending Club) and Chris Larsen (CEO of Prosper) can probably hardly believe their luck. After enduring an admittedly rough patch with the financial crisis in 2008-09 they are now presented with a perfect storm of factors conspiring to help grow both sides of their businesses. This is probably one of the reasons why the monthly loan volume at both companies just keeps going up.
The Fed has indicated the party is not going to end any time soon. And it is still difficult for an individual to get a bank loan. Which is great news for p2p lending.