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Investing in loans to strangers has proved profitable for some in the six years since peer-to-peer lending was first introduced. The industry has passed out over $1 billion in loans, according to the blog Techcrunch.com in the post "Peer to peer lending crosses $1 billion in loans issued."
Prosper and Lending Club are the two big peer-to-peer lending websites. Borrowers can apply for a loan in a way similar to applying for a credit card. Their credit is checked, and if they're approved, they'll get some rate and term options, and then they have to convince investors to fund their loan.
Investors get to decide who they would like to lend money to and how much. Then they sit back and watch the money roll in, theoretically. Estimated returns for both sites can be more than 10 percent.
Obviously, with higher returns come higher risks. That was explored in a Wall Street Journal story from April, "Would you lend money to these people?"
Both sites let lenders spread their investments around to multiple loans, which decreases the risk of losing money, but "institutions that have invested in the loans acknowledge that until the companies have built a longer track record, it is difficult to pinpoint how the loans should be used in a portfolio," the Journal story reported.
Also, the Journal notes, liquidity is very low. Once you're in for a loan, you're pretty much stuck.
Another consideration is the possibility of losing money. Though borrowers are vetted for good credit scores, there are no guarantees.
Full disclosure, I've actually gotten loans from both Prosper and Lending Club but haven't made any loans.
What do you think? While the advertised yields may be better than those elsewhere, there's still an element of risk. Would you lend someone money?
Follow me on Twitter @SheynaSteiner.
Yikes 22 percent? That isn't a good alternative at all. Thanks for the idea, that sounds interesting to me.
I'd love to see BankRate do a story on whether peer-to-peer lending is actually an alternative to bank lending for consumers. I applied to Lending Club for a debt consolidation loan and was offered 22% interest rate and a monthly payment amount, both of which were higher than what I'm currently paying on the debt (credit card and personal loans through banks). Also, I was rejected by Prosper.com. What's the point of the peer-to-peer model if it doesn't offer consumers an actual alternative to banks, that is, a lower bar to become a borrower or lower interest rates?
The most disappointing part of peer to peer lending is restrictions on income for lenders. I beleive it's something like 50,000k yearly gross income is needed to even qualify to invest. Hopefully things will change to allow people below that to lend, I've seen where you can start lending in loan denominations like $25.