A new US study released by Javelin Research & Strategy predicts that more Americans will turn to online person-to-person (P2P) social lending networks to pay off credit card debt, with the amount borrowed for this purpose expected to grow from $38 billion in 2007 to $159 billion by 2012.
The survey of 2200 consumers found that 58% are expected to carry a balance on at least one credit card in the next six months and 44% of these are likely to use a social lending service to pay it off.
Of those questioned, 36% would use a P2P loan to get a better interest rate, 33% to avoid using credit cards and 27% because they do not qualify for a loan from a bank or credit union.
The motivation for offering P2P loans is split between self interest and altruism with 36% wishing to help others who may not be eligible for a loan and the same percentage wanting to receive a higher return than traditional banking products.
However while P2P lending circumvents banks and presents a loss of deposits to banks and a loss of interest income to credit card issuers, Javelin says the P2P networks are not "an immediate threat" to financial firms because consumer awareness of P2P is still relatively low. According to the report, 28% of consumers are either using or are aware of P2P lending Web sites, but this is set to change with growing awareness of services like Prosper and Zopa.
James Van Dyke, president of Javelin Strategy & Research, warns that banks will lose money to P2P lending.
"Although banks can compete on interest rates, the community aspect that defines social lending threatens to leave banks out of the equation," he says. "But they also must get in the game. The first step to protecting themselves is to form partnerships with social lending communities, whether it's by getting in front of the consumer or playing a behind-the-scene role."
This is particularly important as the Javelin study found that the P2P lending market will be driven by younger consumers, as well as those in higher income groups. Consumers age 25-34 and those with incomes over $150,000 are equally willing to offer or accept person-to-person loans.
"We see a surge in popularity among younger consumers because they're accustomed to interacting in the social media space and also used to transacting online," says Javelin analyst Jean Garascia. "Those two factors, plus their desire to help others, make person-to-person lending very appealing."