Study: Social lending poses threat to credit cards

Person-to-person lending could emerge as a new competitor to credit card lending, and that could be good for all consumers, says a new report from Javelin Strategy & Research.

If you haven't heard of person-to-person lending -- also known as P2P or social lending -- think of it as borrowing from a rich uncle.

Except the uncle could be anyone.

And you borrow the money via a Web interface.

And you have to provide a lot more personal information about your credit history than you did to your uncle.

Companies such as Prosper, the UK's Zopa and the recently announced Virgin Money USA are among the middlemen who help complete the transactions.

Javelin's research says that P2P lending will grow, grow fast, and that one of the major sources of demand for the loans will come from people who want to pay off credit card debt.

"With credit card debt in the U.S. arriving at over $880 billion, 118 million Internet users holding credit cards and the average credit card debt for a U.S. adult approximating $5,400 in 2007, the potential credit card debt that could be financed in 2007 tops $38 billion, rising to $159 billion by 2012.

The young and rich -- coveted customers to credit card companies -- are most likely to participate in P2P lending, Javelin says.

As this key cohort turns away from credit cards and toward P2P lenders, our old friend Adam Smith steps in with his invisible hand. (Yes, 18th century economists walked on their hands. Quite a parlor trick.)

Increased competition from P2P lenders, Javelin concludes, will exert "downward pressure on interest rates for credit card products."