This new development really has me intrigued. My guess is that new laws will be formed due to Lending Club’s proposal, and probably they will be allowed to proceed with their plan to let lenders buy and sell loans from other lenders. I just find this all very interesting! You’ve written a great summary here, and provided a load of information and food for thought. Thank you for covering this!

However, I don’t see how there is any less incentive for low-credit borrowers not to repay their loan. A P2P loan is essentially the same as taking an unsecured loan from a bank, or a cash advance from a credit card (without as many fees). The incentive to pay the money back should be the same because it has the same legal ramifications of any other legal loan. Some people argue there is a larger incentive to repay the loans because they were made by individuals not faceless corporations, but I think if people aren’t going to repay a loan, that part doesn’t matter so much.

It is also important to keep in mind there are many people high credit ratings who choose to take a loan through a P2P site instead of a bank (for various reasons). For these people, their credit rating is extremely important and they have every incentive to repay their loan. Like every investment, there is an element of risk involved, which is evident in the interest rates that are charged to the borrowers (much like higher credit card interest rates for those with lower credit).

The loans I have made on Prosper and Lending Club have all been to people with high credit ratings. I prefer a lower risk level in exchange for a higher likelihood of receiving my payment.

Prosper has a different model than LC does which was what I noticed was missing from LC. It will be interesting to see how things shake out for LC.