Wednesday, November 28, 2007

Online banks

Freakonomics blog recently posted about the growth of online lending sites. Indeed these websites have an advantage because they eliminate the middleman, the bank. This allows people to borrow money at a lower interest rate and save money at a higher interest rate. Despite this they also have a huge disadvantage, there is less guarantee that the person you are lending to will pay you back. Banks also have better ways of obtaining information about the loan applicant to see if they have the means to pay back the loan. Finally, backs can disperse most of the bank risk by making thousands of loans, individuals cannot do this unless they are very rich.

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