How to borrow from a stranger

By MarketWatch

This year, Greg Young resorted to something he'd never done before.

The 45-year-old, who lost his job in February working for a mall developer, had never depended on family or friends for money. But his father-in-law offered to help, so Young agreed -- but with a twist.

Young, who lives in Carmel, Ind., tapped Virgin Money USA to set up a "peer-to-peer" loan. He joined a growing number of people unable to secure loans from banks and those hoping to find better interest rates. Borrowers in this slumping economy say the peer-to-peer loans are more accessible and organized than ever before.

"If you're out of a job, you can't go to a bank for a loan. You can have equity in your home, but you can't go there anymore either," Young says. "What are you going to do?"

Gone are the days of a simple handshake deal and dancing around lending money to family and friends.

Startups and students

In Young's case, Virgin Money USA, an arm of Richard Branson's Virgin Group, completed the paperwork. His father-in-law agreed to lend him $25,000 at a 7% interest rate. "The last thing you want to happen is for your credit to go bad," Young says.

Asheesh Advani, the chief executive of Virgin Money USA, says the company's business is booming. Its loan volume jumped to $370 million from $200 million in the past 12 months, with much of the growth occurring in the past six months, he says. Many of the loans were for small businesses, homes and personal expenses, such as credit cards and college tuition.

"Over half of entrepreneurs already get money from friends and family. Twenty percent of students get loans from family," Advani says. "Whether we exist or not, these transactions happen already."

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It's an arrangement that can benefit both parties, Advani says. Lenders receive better interest rates than they would in savings accounts, and borrowers pay lower rates than they would to traditional lenders.

As more peer-to-peer lending companies pop up, they offer varying approaches. Some help set up loans between family and friends; others cobble money from many lenders for a loan between strangers. GreenNote also has tried to capture the college market as student loans in the private sector dwindle.

Room to grow

Peer-to-peer lending companies are in their infancies, but the Federal Reserve estimates about $89 billion in transactions occur annually between family and friends.

Lending Club, Virgin's biggest competitor, reports that it has arranged more than $22 million in loans for borrowers since launching last year. Borrowers post short profiles on the company's Web site requesting loans, and dozens of lenders can contribute until the loan is funded. Rates start at 7.88% for borrowers with good credit histories.

Continued: Streamlining the process

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