Online lending is one of the most rapidly growing segments of the consumer and small business loan markets.
Now that borrowers are trying to persuade their peers, rather than loan officers, to lend them money, would-be borrowers need the right appeal.
So what are on-line lenders looking for?
Some of their preferences are no different from those of banks, credit card companies and other lenders.
Peer-to-peer lenders prefer borrowers with better credit scores and less debt. They would rather lend to people borrowing smaller amounts for shorter duration.
But several academic studies provide other insights into what you can do to increase your chances of getting a loan from an on-line lender.
Some observers say that how people describe themselves and their financial needs is just “cheap talk” and doesn’t affect the chances of getting a loan.
But careful academic research shows that those descriptions really do matter, particularly when would-be borrowers have low credit scores. The more disclosures people make about themselves — the purpose to which they would use the money, the reasons for their bad credit, the interest rate they are paying on other loans, and so on — the less they pay for peer-to-peer loans, even if those disclosures could not be verified by would-be lenders, a paper (PDF) published in 2012 by Jeremy Michels of the University of Colorado, reveals.
In particular, telling would-be lenders the purpose of the loan, the interest rate being paid on other loans, and the reasons for poor credit reduces the interest rate on peer-to-peer loans.
Telling prospective lenders that you are “successful” and “hardworking” also helps you to get funding and to lower your interest rate, a 2011 article written by Michal Herzenstein of the University of Delaware and Scott Sonenshein and Utpal Dholakia of Rice University, reveals.
But describing oneself as “moral,” “religious” or “facing economic difficulties” had no beneficial effect.
Saying you are trustworthy cuts your borrowing costs, a study (PDF) of Smava.de, Germany’s largest peer-to-peer lending site, undertaken by Stephanie Potzsch of the Technical University of Dresden and Rainer Bohme of the University of California at Berkeley, shows. But don’t try to get online lenders to feel sorry for you.
Borrowers who appealed to lenders pity or revealed an unfavorable bargaining position actually paid higher interest rates on their peer-to-peer loans.
Joining groups that provide verification of the information provided by lenders improves the odds of getting funding, even if the information never actually gets verified, a paper (PDF) written by Michael Maier of the University of Alberta, indicates.
The short message is this: take care in how you describe yourself and your loan request when seeking funding from a peer-to-peer lender. What you say will affect whether you get a loan, and if you do, what interest rate you will pay.
Online Loan Application Photo via Shutterstock
As an investor in loans at LendingClub.com, I find the borrower information made available to prospective lenders (investors) is sparse at best. The only way I have found to “judge” a borrower’s character is by the length of employment and past credit history. I don’t know the metrics behind LendingClub.com’s decision making process, but I suspect the have a lot more information than they give the lenders/investors.
While my expertise lies in short-term lending, I too understand how difficult it can be to “judge” character of potential borrower. In my market, we are more accepting, because we have to be. Rejecting a borrower for a short term loan can mean they end up on the street or have no food on the table. It’s important to us to help them make ends meet while giving them options that won’t negatively affect their financial future.
I think that it is also the same with real life. You want to know how they will use the money and what’s in it for you? I think it’s natural. Sure, they may say that they don’t care who you are. But they only care a little compared to what you can do for them.
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