I was recently talking with my dad about peer to peer lending. He could not help but get excited about how the internet is allowing average Americans to borrow and lend money to each other without the banks. At the end of our conversation he asked if I would help him set up a p2p lending IRA. I told him that this is not possible, as he lives in a state that is closed to investors.
This is a very common problem people have around the United States. Thousands of people want to borrow and lend money through p2p lending platforms, but discover they are not eligible because their state does not allow it. However, not all the platforms are the same. Some states are open on one platform despite being closed on another.
Let’s look at which states are available, first for borrowers, then for investors.
Borrowers: 45 States Allow Lending Club Loans
As you can see in the map below, every state currently allows people to apply for a Lending Club loan except Iowa, Idaho, Maine, North Dakota, & Nebraska. As long as some basic requirements are met (like a 640 credit score) you can check your rate at Lending Club.
What if you live in one of the six states that do not allow you to apply for a loan? If you live in Idaho or Nebraska, you are in luck. You can still apply for a loan through Prosper.
Borrowers: 47 States Allow Prosper Loans
As you can see below, almost every state in the US allows people to apply for a Prosper loan except Iowa, Maine, and North Dakota. As long as some basic requirements are met (like a 640 credit score) you can check your rate at Prosper.
Investors: 27 States Open to Lending Club
As you can see in the map below, many states allow you to also lend money through Lending Club: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
Even if your state does not allow investing, eighteen states (like Texas, Pennsylvania, & Arizona) allow trading on the Lending Club secondary market through Foliofn. Open an investing or trading account here. Note: Kentucky residents have to be accredited.
What if you live in one of the 23 states that do not allow Lending Club investing? If you live in Alaska, Michigan, Missouri, Oregon, or South Carolina, you are in luck. You can still become a lender through Prosper.
Investors: 31 States Open to Prosper
Currently 31 states are open for people to become investors at Prosper: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
Click here to open a lending account through Prosper.
Lending Club or Prosper?
If you are one of the lucky states that is available to both Lending Club and Prosper, you get your pick. You can read a thorough comparison of the two platforms at my Lending Club versus Prosper post. Personally, I have lender accounts on both platforms (see my returns here), and believe this diversification helps spread my risk.
Why Doesn’t Texas or Ohio Allow P2P Lending?
As you can see in the maps above, around twenty states do not allow any peer to peer lending at all. Why not? The answer is very complicated, largely because peer to peer lending is brand new. Both the platforms have to get each individual state to approve access, and financial laws are different from state to state. Some states, like Rhode Island, have looser financial laws. Others (like Texas, Ohio, or Maryland) are quite strict. In many ways, their strictness is a bit ironic. Every state in the US allows people to invest their cash in risky penny stocks or junk bonds, yet stable and consistent avenues like peer to peer lending are not allowed. I have to believe that this will change as it becomes more mainstream.
Thankfully, most people in the United States can still trade peer to peer notes through Foliofn, Lending Club’s secondary market. While a large state like Texas forbids the average Texan from funding new loans, their citizens are free to buy and sell notes that have already been issued.
Coming IPOs & the Blue Sky Exemption
When I sat down with Lending Club’s COO in May (read the interview), Scott Sanborn described how Lending Club has a goal to become a public company sometime in 2014. When this does happen and Lending Club has an IPO (TechCrunch), the so-called blue sky exemption will happen, and all the states should open to the public for investors.
If you are one of the unlucky inhabitants of a state that does not allow peer to peer lending, I encourage you to wait until Lending Club’s IPO next year. At that point, p2p lending should be available to every state nationwide. I assume Prosper will have a similar exemption if it has an IPO sometime in the future as well.
Lobbying the Regulators
If you want to help your state accept peer to peer lending, you can always contact your state representative. More effectively, you can contact your state securities regulator here. Ask them why Lending Club or Prosper is not allowed, making sure to voice your opinion that peer to peer lending is a safe and transparent way to invest and borrow cash.
The reality is that many states could allow peer to peer lending if they wanted to, they simply don’t understand what it is.
The Future of P2P Lending Eligibility
While many of us in the peer to peer lending community continue to be frustrated by the lack of states that allow it, we have great hope for the years to come. Anything innovative had to start somewhere. While almost everybody uses a cell phone these days, they originally only worked in the city of St. Louis (and weighed 80 pounds!). Lots of regulatory hurdles had to be crossed before the national network was formed that we all use today.
Sometime in the future, peer to peer lending will hold a similar place in society. People everywhere will be enabled by technology to lend and borrow money from one another with ease via the internet. Until then, we will have to work with what we have.