By Jason Cox
Find more articles by Jason Cox on his blog at www.stingyfriend.wordpress.com
The Internet has re-invented how we live in many ways - we send and receive mail instantly, we can read our news without the risk of a paper cut, and now we can borrow and lend money directly to each other.
While this may not be a novel idea (you still owe me $5, Jim), it is a novel idea to make peer to peer lending easy, legal, and with relatively low risk.
The idea is to cut out the middle man (in this case, a bank) and loan money directly to each other. This results in lower rates for those applying for loans, since the person loaning the money doesn't have the overhead costs that a bank does.
This also results in a new investment opportunity for anyone with a little extra cash to make a better-than-average return on their investment. Most loans that are currently being made on peer-to-peer lending sites seem to be in the 7% - 13% range, depending of course on the amount of the loan, the credit history of the person requesting the loan, and other risk factors.
As a lender, there are risks - whenever money is involved there is always the chance of someone not paying you back.
However, any good peer to peer lending website will inform you of the applicant's credit history, and usually the reason they are looking for the loan. As with any investment, greater risk equals greater reward, and you can choose to fund a riskier loan for a larger interest rate.
Also, if the person would happen to default on their loan, the peer-to-peer lending sites report it to the credit reporting agencies just as a bank would - making it difficult for scammers to thrive.
The best feature of these sites, though, is their ability to allow lenders to greatly control the amount of risk in their investment. The way they do this is by allowing lenders to not only choose the people they would like to lend to, but also how much of the loan you may want to fund (you don't want all your eggs in one basket now, do ya?).
Most peer to peer sites allow lenders to fund loans in $25 - $50 increments, and I suggest that if you're interested, you start by funding many loans with as small an increment as possible - thereby diversifying your portfolio and minimizing risk.
Some sites even have portfolio plans, which automatically choose the loans that you will fund based on the risk you are willing to take, as well as your target rate of return.
A couple well-known peer-to-peer lending sites are www.prosper.com and www.lendingclub.com, both of which will shed more light on the topic if you're interested. The great thing about this new form of lending is that it is a win-win for both the lenders and the borrowers when used correctly.
If you are considering making this an investment tool, do your homework on the particular site you decide to use, and on each loan you decide to fund.
Check out this link for another, more cautious viewpoint on peer to peer lending. http://www.credit.com/news/experts/2009-02-26/peer-to-peer-lending-good-...
