What is Peer to Peer Lending and is it Risky?

by Junior Boomer on August 16, 2010

Peer to Peer lending (sometimes called social lending or person-to-person lending) allows people to borrow money from other people, or lend money to others, without traditional bank participation.  The internet has made peer to peer lending popular, where people looking for a loan can post their need and others can offer to lend the money.
Peer to Peer Lending
Creative Commons License photo credit: taberandrew

Popular Peer to Peer Lending Sites

The two most popular peer to peer lending websites are Prosper.com and LendingClub.com.  You can register as either a lender or a borrower on either site.  As a borrower, you can create your loan listing if you meet certain credit score criteria and income criteria.  You can select the highest interest rate you are willing to pay. Not everyone is eligible to borrow through peer to peer lending sites, but they seem to be more flexible than a traditional bank.  Once the listing has been created, lenders can view and decide whether or not they want to lend money to you and at what interest rate they’re willing to accept.

On both of these peer to peer lending sites, lenders agree to lend a percentage of the total amount requested.  So each loan listing will have multiple lenders, which minimizes the risk to the lender (rather than providing $3,000 to one person,  they might only lend $500 to 6 different people so the risk is spread out).  The lending sites handle transferring the money to the borrower when a loan has been funded; and then handles the payments from the borrower back to each of the lenders.

Are Peer to Peer Lending Sites Risky

All investments have an element of risk to them, otherwise everyone would be walking around as a multi-millionaire!  Social lending allows an investor (lender) to review very detailed information about the financial situation of the people they might lend money to.  Lenders can even ask the borrowers questions about their finances, debts, and income.  Try getting in touch with a CEO for answers to questions about stocks you’re considering!

When comparing peer lending sites to more traditional investments like real estate or the stock market, peer to peer lending is averaging an average annual return of 9%.  Last year, according to Brookings.com, the stock market averaged a 6% return.  Real estate, after adjustment for inflation and borrowing costs, can claim about a 4% return.  With the risks associated with lending to people is the potential for a higher reward.  Social lending also appears to have a strong future – with more people looking for bank alternatives for loans, and avoiding credit cards, social lending may grow even more popular than it already is.

If you decide to become a lender in social lending, just make sure you do it as part of a diversified portfolio, as you should with any type of investment vehicle you choose, in order to reduce your overall risks for losing money.  Analyze every borrower before making a decision to fund part of their loan, the same way you would spend time researching and analyzing stocks before making a purchase.

Lending Club is My Peer to Peer Recommendation

I’ve used Lending Club for the investing side and I’m averaging just around the 9.62% they boast about.   (I’ve been investing with them for just under a year).   I’ve not yet to use them for the lending side, but what I’ve read; people have been satisfied.

Ready to Try Lending Club?


Want to try out Lending Club? Just click above and get $25 towards your first investment today.

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{ 4 comments… read them below or add one }

Mysti August 16, 2010 at 5:24 pm

We recently obtained a Lending Club loan. $13,600 funded by 224 people in about 5 days. We are thrilled with the process and the end result. We paid off a credit card balance of almost 11k @ 19.24% and paid down another with 14.24%. Our loan is for 7.88%. Score!

Pat Broce January 3, 2011 at 7:54 am

Curious if your investment is still paying around 9%.

Junior Boomer January 4, 2011 at 10:23 pm

Just checked last week and I’m still averaging just over 9.5%. :)

Gloria July 17, 2011 at 8:19 pm

I was interested in the Lending Club idea but I am far from having the income and lendable funds qualifications. I checked out Prosper.com then a few blogs concerning their unscrupulous tactics. So, I am wondering what other self-directed investing options are available to us poor folk who are trying to get started in creating some sort of return on a small investment. Any info would be helpful. Thanks!

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