Peer to peer lending ( p2p lending) is gaining traction as a legitimate investing vehicle. All of my favorite investing books break investing down into stocks, bonds, CDs, mutual funds, etc. P2p lending is carving a niche for itself. P2p lending allows individual investors to borrow and lend money without the help of a financial institution.
Instead of the bank taking my money and lending it out while I earn a small interest rate, I can lend my money directly to another individual. P2p lending does involve more risk to the individual. The two major p2p lending sites are Lending Club and Prosper.
Prosper claims investors can earn between a 7% and 13% return on invested money. Similarly, as a borrower, Prosper claims you can secure a fixed rate loan for as low as 7.5% APR.
As a borrower, you can list a loan for an amount between $1,000 and $25,000. The borrower then sets the maximum rate they are willing to pay and writes a story about why they want a loan.
As a lender, you decide the amount of money you want to lend and the minimum interest rate they want as a return. The lender then uses criteria like credit history (minimum 640 credit score), combined with the borrowers personal story to pick loans to bid on.
Prosper takes the bids with the lowest rates, does some sort of combinatorial magic and lumps all of the loans into one easy rate for the borrower. Notes are then awarded to the winning bidders. Because Prosper uses an auction system, the borrower ideally gets to watch the interest rate decrease as more people bid on the loan.
Prosper services all of the collections from borrowers and makes payments to the lenders. Prosper charges a lump sum fee up front on the borrower and a servicing fee of 1% to lenders.
Sign Up to Prosper
It really is as simple as that. It took me 10 minutes to set up my account. They ask for all of the standard account opening information and even assign you a random screen name (mine was liberty squirrel). If you sign up now, for a limited time, Prosper will give you $50 to start.
So far I have two bids that are waiting for the auction to end. The process for finding loans was extremely easy. I used the advanced search to find AA borrowers (borrowers with the best credit score) with a low debt/income ratio. I then looked for a rate around 10.00% with an interesting story.
Currently, I bid on a loan to somebody who is raising money to pay for a medical procedure for his wife. He is setting aside $2,500 a month as it is to fund this surgery, and requires the loan to have the surgery earlier. They should be able to easily afford the monthly payments if they were putting away $2,500 a month.
Also, I bid on a loan for a budding web entrepreneur who wants to hire a web publisher. They are already making enough money through Adsense to cover the monthly payment. They believe the addition of a publisher will help the web site grow exponentially.
The bottom line is I bid on two loans that could earn me 10.00% when both of the borrowers appear to be able to easily cover the monthly payments.
I highly recommend p2p lending as a part of your investment profile. I’ve mentioned adding $25 a month to my Lending Clubaccount and may decide to do the same to my new Prosper account.