If you are an entrepreneur with a great idea for a new business, but not enough credit history or professional experience to meet the lending requirements of traditional banks then peer-to-peer (p2p) lending may be for you. Although p2p lending is not a new idea, people have been lending to friends and family for years, the internet has made it easy for people who have a few extra dollars to connect with people who need a few extra dollars.

What is P2P Lending?

P2P lending is one individual lending to another without a bank acting as a middleman. Traditional bank loans are funded through customer deposits, for example:

Saver -> Deposit account earning 2% interest.
Bank -> Lends those funds to other customers, incorporating fees and overhead costs.
Borrower -> Receives loan from bank at an 18% interest rate.

With p2p lending the bank's role is eliminated and as a result the saver can earn a higher return and the borrower can receive a lower interest rate.

Lender -> Lends money at a 12% interest rate
P2P Lending site -> Charges a nominal fee .5% - 3%
Borrower -> Pays an overall interest rate of 12.5% - 15%

Typically you can get loans from $5,000 to $25,000 and lenders cannot offer to fund more than they have on deposit with the p2p lending website. This ensures that people do not offer to fund your loan if they do not have the money available.

Why Should I Use a P2P Website?

P2P sites can help you screen prospective borrowers by providing a credit and employment check, as well as maintain the privacy and confidentiality of your, and the borrower's, financial information. Prosper.com runs a credit check on prospective borrowers and places them into risk categories so that lenders can easily identify who they would like to lend to, there is also an option for verifying employment and income information and members are able to give each other endorsements. Borrowers create a loan listing with as much information as they want and set a maximum interest rate, lenders then bid on that particular loan, they more bidders the more likely the borrower is to get a lower interest rate.

P2P lending sites also decrease risk for individual lenders by spreading out risk. Because lenders have the option of funding only a portion of a particular loan, for instance if someone borrows $5,000 and 100 lenders each contributed $50 to the loan and the borrower defaults each person only loses $50.

Where Do I Go for P2P Lending?

Check out the following p2p lending websites:

www.prosper.com
www.thelendingclub.com
www.virginmoney.com
www.zopa.com
www.kiva.org
www.loanio.com

Learn more about this author, A. M. Lacy.
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