Peer to Peer Lending with Collateral: The Next P2P Financial Innovation?

Auxmoney, a German peer to peer lending website, is now allowing borrowers to offer their vehicles as a form of collateral for their peer to peer loans.

Users on the website pay a EUR 9.95 fee to document the collateral in the loan listing. As part of the listing, information about the vehicle, such as mileage, condition, model, year and pictures of the vehicle are displayed in the listing. Typically an estimated value of the car serving as collateral will be included as well. Under the service, the car put up can cover any percentage of the loan amount.

If the loan is funded on the website, the contract between Auxmoney and the borrower allows the borrower to continue to drive the car, but must deposit the certificate of ownership with Auxmoney until the loan is repaid. If the borrower misses a loan payment, Auxmoney has the right to sell the car.

Peer to peer lenders in the United States, Prosper and Lending Club, currently only offer loans that are unsecured. As a result, both companies have seen higher default rates than they would have liked. Prosper originally boasted that their default rate was only 2%-3%, however four years into the process, some of the earliest loans that the company originated were had default rates as high as 40%.

Both companies have adjusted their lending models to reduce potential defaults by ensuring that only credit-worthy borrowers can take out loans from their services, but adding some form collateral would be an additional way to reduce the risk to investors, allowing a borrower to get a better interest rate. Creating collateralized peer to peer loans in the United States would certainly add a lot of paperwork for Prosper or Lending Club, and would likely necessitate an increase in fees for managing the loans that are originated.

Offering a car as collateral doesn’t provide 100% security on the loan, but many lenders will likely see borrowers that are offering their vehicle as collateral as lower risk. Auxmoney has a stats page which will track the performance of these loans.

(Special Thanks to WiseClerk for the heads up)