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What is Peer to Peer Lending?

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.

How Peer to Peer Lending Works at Lending Club

How Peer to Peer Lending Works at Lending Club

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.

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Last Edited: June 27, 2017 @ 3:36 pm
About Philip Taylor

Philip Taylor, aka "PT", is a former practicing CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of FinCon, the conference and community dedicated to helping other financial influencers and brands. He created this website back in 2007 to share his thoughts on money, hold himself accountable, and to meet others passionate about moving toward financial independence.

PT uses Personal Capital to keep track of his financial life. This free software allows him to review his net worth regularly, analyze his investments, and make decisions about his financial future.

PT keeps a portion of his emergency fund in Betterment, the automatic investing tool that makes investing super simple. Betterment focuses on what matters most: savings rate, time in the market, investing costs, and taxes. PT recommends this service to anyone looking to get started investing for themselves.

All the content on this blog is original and created or edited by PT.

Comments

  1. Anyone know of sites similar to lending club and prosper? I am a lender and borrower with both of these sites and have been very happy with my experience at both sites.

    Thanks.

  2. Jo/GaelicWench says:

    I am a borrower with Prosper, and to date, am current with paying back my loan. I plan to refinance the loan (I got back in October ’09) once I’ve paid off high interest cc debt with higher balances (<$4,000). I've been treated well by Prosper and its lenders, and refuse to mistreat my lenders in return by defaulting on my loan. In the meantime, I honestly have no issue about these folks making a "few" bucks of investment returns off my payments; it's far more preferential than owing the "too big to fail" banks!

    Thank you for trusting me with your money, Prosper lenders….you know who you are.

    Nice article!

  3. yesiamcheap says:

    Good introduction to P2P lending. Do you participate? I have about $200 loaned out on prosper earning an average of 9.15% interest. it’s tons better than i would get otherwise.