The Basics of Peer-to-Peer lending
Peer to Peer (P2P) lending is a new way that the Internet connects lenders with borrowers. The concept is very simple but will vary slightly with each website company. A borrower needs money and creates a basic listing that details why they would like the loan “the pitch.” The then enter their personal information for the site such as their social security, job, annual salary, etc. The site will then run your credit and spit out a “Credit Rating” which in the end determines what interest you will get. The site will then tell the lenders that you are “X” credit rating, show recent inquiries, debt to income ratio, etc. This in turn keeps your actual identity private while assuring lenders of your credit worthiness.
Borrowers: You typically can get a better interest rate at a good P2P site than with banks. The terms are fixed for three years and use automatic deposit. It makes it easy to manage your payments and get out of debt quicker. Banks offer higher rates with longer terms which keep you constantly in a cycle of debt. Whereas these sites are simple, straightforward and after 3 years or less you are done. No prepayment penalties, pay a little extra every month and shorten your tern.
I was a borrower on a popular site for 18 months. I put down a little extra every month and paid the loan off in half the time. My interest was very low compared to a bank or credit card. The best thing was that the bulk of the interest was going to regular people and not to Big Businesses. I get frustrated with the way credit cards treat us and abuse us!
Sites make their money by charging a small fee to the borrower (origination fee) and then around 1% off the monthly payments from the lenders. This is a new industry and most of the businesses are currently shut down registering with the SEC. The only good site with stable returns currently operating is Lendingclub.com
Lenders: A tip for the lenders. I invest several thousand dollars in the market before the current recession. If there had been no recession I would have yielded a decent return, however the market came and I learned a valuable lesson there is a risk. I learned that the only loans people seem to repay are those with small monthly payments irregardless of the borrowers credit, salary, etc.
Only read what people say to weed out obvious scams, spelling errors, ponzie schemes, no good reason for the loan, but other than that ignore the plea. Focus on their debt to income ratio, credit score and keep your loans to to $25-$50 each per person. The most important things is to never lend to anyone over $10,000.00. I try to keep it between $5k -$10k. This keeps the monthly payments very low and the high credit rating and low debt to income ratio give me more assurances that the loans will be repaid.
Luckily I learned this lesson soon and reinvest the dividends and quickly brought my portfoilo up again. There is risk, but if you choose wisely and in small amounts you will find that you can yield a 10% return after your losses. There are sites that ecourage humanitarism for third world countries, the yields are unfortunately so low that you make less than a CD or Bond Fund. I recommend looking into the following sites:
LendingClub.com
Prosper.com
Loanio.com
I highly recommend this method for obtain loans as a borrower and for an investment vehicle. Do not in any circumstance put your entire life savings into this method. This should be one of many vehicles, 401k, bonds, stocks, P2P and many more to ensure a diversified portfolio.