Financial crisis spells business for lending sites

By Carey Gillam

KANSAS CITY, Mo. (Reuters) - One woman wants to pay off medical bills. An Ohio couple wants $5,000 to start a home business. An Illinois college student needs help with tuition.

With bank loans drying up amid financial turmoil around the world, these would-be borrowers aren't looking to traditional channels for money. They have turned to the fast-growing online industry of peer-to-peer lending, in which online companies like Lending Club, Prosper and Loanio connect people who need money with those who have it.

Through this peer-to-peer arrangement, borrowers get the money they want, typically at lower rates than through a credit card or bank, while individuals lending the money collect higher interest rate returns than they might find in more traditional investments.

Twelve traditional banks turned down Tim Murphy's request for a $25,000 loan to start a gourmet popcorn shop in an Atlanta suburb, but he found 97 different individuals willing to share in lending him the full amount through Lending Club.

Murphy's 1,600-square-foot store now offers a dozen varieties of popcorn, including parmesean and garlic, ranch-flavored and nacho cheese.

"It's growing, slowly, but growing, said Murphy.

While demand for peer-to-peer loans is on the increase as traditional banks tighten their lending, the model is not without its problems.

Prosper earlier this month stopped signing up new lenders while the Securities and Exchange Commission evaluates its regulatory filings, a process that could take up to six months.