Peer-to-peer lending is when an individual loans money to another individual without the use of a middleman, like a bank. By bypassing the intermediary, P2P sites allow for people to invest directly to each other to reap social and financial awards.
America’s leading P2P website Prosper Loans Marketplace, states three easy steps on how P2P lending works. First, the borrowers choose a loan amount, purpose, and post their request. Second, that investors review submitted requests and invest in what they like. Lastly, once an investor has chosen a company, borrowers make fixed monthly payments until they repay the loans. As of January 2012, actual return rates for Prosper investors hit 10.69% whereas borrowers dealt with fixed rates from 6.59% to 35.84% APR.
Just like the stock market, there are some risks with P2P investing. Borrowers could potentially default on their loans, and although P2P websites pursue funds through collection agencies, there is still the possibility of losing money.
An attractive feature of P2P lending is with the rates. Rates for borrowers are usually better than traditional bank, lower than 10% – this is especially striking for borrowers unqualified for regular bank loans due to poor credit scores. For lenders, there are often higher returns with P2P in comparison to that received from their savings accounts.
The average loans on a P2P network range from $2,500 to $25,000 and last between 3-5 years. The minimum investment is often $25.