Peer to peer lending is an alternative to traditional institutional lending. In peer lending, or social lending as it’s sometimes called, the banks and credit card companies are bypassed and a middle-man company manages loans from people to other people. Money is lent, money is borrowed, money is paid back. Simple. The idea is that the borrowing process will be more pleasant if banks are excluded. And money is more likely to be paid back if you know you are paying back individuals and not some faceless bank.
Before, when consumers need a loan, we typically turned to banks and credit card companies, traditional institutions, to help fill the need. If we were rejected for a loan going this route, we would turn to friends and family to help up out, either getting a direct loan from them, or getting a co-signer for a traditional loan. Or, we would just do without the loan.
Peer lending, thanks to the power of the Internet, makes it easier to get loans from other people. It’s the sophisticated way of bypassing the banks. Also, because so many people get involved, the risk to the lender can be greatly reduced, similar to how a mutual fund reduces the risk in the stock market.
Who Participates in Peer Lending?
You can get involved with peer to peer lending both as a borrower and a lender (investor). People borrow for all sorts of reasons (e.g. payoff debt, prop up their business, to pay for school, a wedding, a vacation). People lend (or invest) for one reason: to get a return on their money.
As a borrower, you will be pre-screened by the lending service and given a credit limit and interest rate at which you can borrow money. You then have access to the funds and a payment schedule to pay back the loan.
As a lender, you decide how much money you want to invest, build a portfolio of loans (small amounts spread across many loans), and sit back and rake in the returns. There is some risk involved though, so be smart about how much money you invest here. As an investor in social lending sites you should never lose site of the fact that a lot of borrowers are there because they couldn’t get a loan elsewhere.
Keep in mind that not everyone can participate. Borrowers are screened for credit-worthiness. And lenders are restricted by State rules (i.e. I can’t participate as a Texan).
Peer to Peer Lending Sites
The major players in the peer lending world are Prosper and Lending Club. Click on the appropriate links below to get started with peer lending.