Do You Know the Benefits of Peer to Peer Lending?

You've seen the rise of p2p, also known as peer to peer, or people to people, sharing networks.

They are simply networks where ordinary people share information, products, files, etc., with each other. You might not know that these peer to peer or people to people networks have entered the loan and investment marketplace.

There are several p2p, or peer to peer lending clubs or networks. Some of the biggest peer to peer or people to people loan networks include The Lending Club, Zopa, Loanio and Prosper.

There are slight variations among these person to person lending clubs or networks and they all operate in one or more countries. Zopa is an international p2p lender while The Lending Club currently operates in the United States only.

The p2p lending and investment networks are usually set up in such a way that ordinary people have the opportunity to invest in loans to other people, their peers, at a fixed interest rate for a fixed period of time. For instance, peer loans at Prosper and The Lending Club normally run for three years with the option for the borrower to pay off the loan early if they so desire.

With a p2p loan, you request a specific amount (normally from $1000 to $25,000) at a certain interest rate and then other individuals bid on portions of your loan. If enough people bid on your loan it is likely to get funded. You will then pay the loan plus interest over a three year period. Fees are also paid to the institution that handles the transaction, e.g., Zopa, Prosper, etc.

As an example, a peer loan at the Lending Club is a loan that anyone in the United States with a certain minimum credit score can apply for. One of the benefits of this type of loan is that the interest rate you pay to borrow money if you are the borrower is usually substantially lower than any interest rate you would pay for say a payday loan or cash advance. These loans are also unsecured meaning that they are no collateral loans. In other words you don't have to put up anything in order to secure the loan.

On the investor side of the coin, the p2p investor gets to pick and choose which loans they want to invest in and can lower their investment risk by investing in increments as low as $50 in many cases. The borrowers credit history is reviewed and they are given a letter score based on their credit worthiness. This helps the p2p lender determine which loans are more attractive to them.

One of the social network aspects that can make this a fun endeavor is that the borrower gets to make their case, hopefully for them in a manner that entices investors or lenders to bid on their loan request. The peer lender then sifts through the various loan requests looking to invest in those that make economic sense for them.

These people to people loan networks usually contain a vast array of loan requests varying from people seeking auto loans, school loans, and home improvement loans to those wanting money or cash for startup business loans, vacation loans, and loans to fund weddings just to name a few.

It can be interesting to peruse the various p2p loan requests looking for those stories that have appeal. You may be helping someone start a business, care for a sick loved one, have the wedding of their dreams or help fix up their home.

Many lenders balance their investments between various borrowers based on the borrowers personal story, their credit scores and the interest rate they are willing to pay, seeking the highest paying investments with the lowest risk.

The amount you as a p2p investor can make from these individual unsecured personal loans may range over 20% interest per year. Of course, even with the transparency involved their is no guarantee that defaults will not occur. Most sites will list their default rate based on the loan type, including the amount requested and the credit grade of the borrower. This helps the peer investor determine the real rate of return on their investment. And, while the defaults may bring your total return down somewhat, it is still usually more than banks pay, without the FDIC insurance of course. In addition, the intermediary usually contracts with loan collectors in attempt to collect on the debt for you in case their is a default.

Another aspect of the process that is beneficial for both the peer borrower and lender is that some of these peer to peer lending networks now offer their members the ability to buy and sell their loans in a secondary market making them more liquid. Not all lending networks offer this perk but the market seems to be heading this way.

In summary, peer to peer investing and lending now offers you as a borrower or a lender another avenue of choice in the broad spectrum of available financial opportunities. Before making an investment or seeking a loan please do your due diligence and make sure you are aware of all the risks as well as the benefits of the particluar p2p investing and lending club of your choice.

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