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People's Daily Online>>China Society

Private online lending deserves credit (2)

By Duan Yan (China Daily)

10:18, January 31, 2012

'Countless' borrowers

As for Yang, "I was nervous at first when I lent my money to several strangers." But the average annual return of 12 percent is much better than that of the stocks she invested in.

Yang joined the website three years ago on a friend's recommendation and invested 3,000 yuan just to "try something new". She has also invested in the stock market and gold.

Now she has more than 200,000 yuan out in active loans to "countless" borrowers. "I used to text my borrowers or call them when they were a few days late on their payments," Yang said. "Now, with so many borrowers, I don't really have the time to call them anymore."

She explained that with a lot of active loans, she manages a good return even when some loans go bad.

The website makes money by charging a 2 percent or 4 percent closing fee from the borrowers, based on the length of the loan, six months or a year. It also collects fees for late payments from borrowers. When a loan payment goes 60 days past due, the website uses part of the closing fee to compensate the lender for the default.

Why, how they work

The idea behind the Chinese sites is that borrowers who were neglected by traditional banks can find money while lenders can earn higher returns than saving their money in a bank.

"Unlike many Prosper and Zopa users who borrow money to pay off their credit cards, a majority of Chinese borrowers use our service to borrow money for their small businesses," said Zhang Jun, co-CEO of ppdai.com.

The site says it is the first Chinese peer-to-peer loan organization. Launched in August 2007, it now has more than 650,000 members and has facilitated more than 200 million yuan in loans so far, Zhang said.

He said about 40,000 to 50,000 of the members are active users. Many who registered did not provide the documentation to verify they were qualified for a loan.

Borrowers on P2P websites post how much money they need - up to 200,000 yuan on ppdai.com - along with the purpose of the loan and what interest rate they can afford. The interest rate cannot exceed four times that of bank loans, under an existing rule on lending by the Supreme People's Court.

Lenders bid to make the loans, typically funding only partial amounts and diversifying their risk among dozens or hundreds of loans. The minimum bid is 100 yuan on ppdai.com.

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