Do you know what peer-to-peer lending is? If not, you should! Peer-to-peer (P2P) lending is a popular alternative to traditional loans and investing options. In a nutshell, the middleman (financial institutions such as banks) is cut out and people who need money connect directly with those willing to lend money. This type of lending and borrowing has been made possible by companies such as Prosper with only a few clicks of the mouse. If you want to learn more or even borrow/lend money then click on the Prosper link.
Let me give you a common scenario to show when peer-to-peer lending would be beneficial. You are a small business owner. Your company has been profitable but doesn't have a long track record. You need $15,000 to purchase more inventory and give your company a boost to the next level. A visit to the bank for a traditional loan leaves you empty handed after being declined a loan. After all, you don't have a long track record and the banks have strict lending policies for the time being.
What if you could borrow the money from peers? Maybe borrow $50, $100, or $200 from several different people and pay them back over a 1, 3, or 5 year term. With Prosper this is possible, and very simple.
Prosper loans are not traditional small business loans. The loans are based on your credit as an individual, not a business. Your interest rate will be determined by your credit score and you will then have access to money that traditional methods would not provide. Because there is no middleman collecting a spread on the rates, borrowers get better rates and lenders get better returns.
As a lender in P2P lending you generate income in the form of interest, which can often exceed the amount of interest you would earn by traditional means such as savings accounts or CDs. This is especially true today as rates are barely above zero.
However, there is a downside. There is no collateral so there is little assurance that the borrower will repay their loan. There will always be defaults, which is a risk you must consider before investing.
Let that business savvy mind think for a minute...
This is still a great investment opportunity! Maybe 5% of the borrowers will default, so remember that thing called "diversification"? If you want to lend $1,000, lend $50 to 20 borrowers instead of lending the full amount to one borrower. 1 borrower may default on their loan and you will still collect a great return on the remaining 19.
Every day people borrow money from peers for reasons such as debt consolidation, weddings, home improvements, vehicles, or baby/adoption expenses. As such, the dollar amount of P2P loans outstanding is increasing drastically every day and you will certainly hear more about it in the near future. Below is the P2P loan growth for the leading P2P companies.
Now that you are more educated on the topic, impress your friends and family when the topic arises!