Peer to Peer Lending:
As an Investment
Peer-to-Peer (or Person-to-Person) lending is a term given to a type of lending or borrowing where individuals lend or borrow directly to each other rather than through a traditional financial institution, like a bank, using a company which only oversees the transactions, for a small fee, but does not manage the transactions themselves. This means that it costs less to borrow money and the individual lender makes a higher rate of return on their investment.
Why Its a Good Idea
Two reasons:
1. As a borrower: Borrowing money you get to ask for just the amount you need, not what a bank offers you. In this way, you pay back a much smaller amount and with a lot less in interest payments and fees. Plus, you can often set the term - time you have to pay back the loan. Also, you get a much better rate than with many banks, some Credit Unions are the exception to this rule because as a member you already get better rates over a traditional bank.
2. As a lender: By lending money, you get to chose the amount you want to loan, usually starting at $25 and up. This reduces your risk, a lot, where in some rare case someone defaults on their loan. Being the lender, you also get to earn any late payments, should someone make a late payment on their loan. As a lender, you also get to chose how much risk you would like to take by choosing who you would like to lend to, which also allows you to chose the rate of return on your investment.
All around, Peer-to-Peer lending is a good choice for both the borrower and lender. As an investor you get to make much higher rates of return on an investment than with a bank or many mutual funds, especially during this Recession (2007- ...).
Not only have banks been paying less to account holders, the credit card industry has also gone in the opposite direction charging ever increasing interest rates and fees. This makes Peer-to-Peer borrowing and lending so much more attractive and for you as an investor – you can use lending as part an overall investment portfolio earning higher rates of return without all the fees typically associated with the investment industry. At the time of this article (9/1/2009) lenders are being paid an average of 9.64% interest on the money they are lending. My weighted average is now 11.5%, which means on a hundred dollars I am making just over $11.50 per year.
Is my money safe?
Yes, for the most part. You do not have any guarantees as loans, they could go bad, but the good thing is, organizations, like Lending Club, are under the oversight of the SEC (Securities and Exchange Commission). Prosper has been ordered to cease-and-desist all business, but Lending Club (the one I use) is in good standing and has complied with SEC filings and regulations. That’s a good think.
Default rates are low, usually lower than those of the traditional banking industry. It may be because people feel a bit more connected to the lender than with a bank, which is often seen as an impersonal institution. For the past year, the default rate is below 1%, with over three million in loans being made. Not so good for the lender, but for the borrower, a third of the loans were paid off early, again a higher rate than banks see.
What is also nice is that Lending Club does a credit check and it makes the information public so a lender can decide using various factors whether to make a loan or not.
If someone is at all interested in making a higher rate of return than what their bank is offering should look into Lending Club and give it a try. It is truly a Win-Win situation for both the lender (you) and the borrower.
