Peer to peer lending companies have gotten a lot of coverage in major publications, such as Bloomberg News, as of late. Prosper.com and Lending Club are now issuing millions of dollars in loans each month, but both peer to peer lending companies are largely unknown by the American public.
What is Peer to Peer Lending?
Peer to Peer lending is the process of connecting investors with money that want to make loans and receive a competitive rate of return with borrowers who would like to get a loan. Traditionally, this would happen indirectly through banks as depositor’s money would be re-loaned out to other customers, but companies such as Prosper, Lending Club and other loan clubs have decided to take out the middle man in hopes of providing borrowers with better interest rates and lenders with better rates of return on their money.
Let’s say that you want to borrow money from Prosper, Lending Club or another peer-to-peer loan club. First, you would create an account on the loan club’s website. The company would then pull your credit score and assign you a letter grade for your credit. After your credit is checked, you can post a loan on the loan club and then there’s a period where lenders can choose to partially fund your loan. Typically, your loan will be filled by many different investors that all put $25 to $100 toward your loan.
After your loan is fully funded, you will receive the funds via check or electronic transfer. Typically loan periods are anywhere from 3 to 5 years. You’ll make the payment to the loan club and they will distribute your money to the investors that helped fill your loan.
What if I want to Invest?
Investing by filling other people’s personal loan requests is a great way to diversify your investment portfolio. After the stock market dropped by over 40% in a period of one year (March ‘08 to March ’09), investors realized that diversification really matters. Since the performance of your investment is not dependent on the stock market, the bond market, or any other investment exchange, investing into personal loans through al loan club, such as Prosper, Lending Club or others is a great way to diversify your investment portfolio.
Most investors have chosen to go with Lending Club because of their reputation and that they are registered with the SEC. To get started with Lending Club, head on over to their website and click the “join now” link. You’ll enter in some personal information, get a confirmation email, and your account will be ready to go. Once you’ve got your account setup, you can transfer money into prosper or lending club with PayPal or via electronic bank transfers and starts lending money.
Lending Club states that the average rate of return their investors are receiving is currently 9.68% — that’s a lot better than the stock market has performed in the last year.
