Peer-to-peer loans, also known as social lending, is people lending money to other people or businesses. The only bank involvement is to facilitate the process. Individuals post their loan request on a peer-to-peer lending site (much like EBay) with details such as: desired interest rate, reason for loan and payback intentions. Then lenders bid on the loan requests with a proffered interest rate.

Peer lending loans are unsecured loans, which means there is no collateral requirement, but your company's credit weighs heavily in the decision process. Your credit score may affect your interest rate and/or payment amounts, if you are able to secure a lender. The concept of people helping people is not new, but it is happening again. For more peer-to-peer lending education and training, please see the following information:

1. Learn how to request a loan on peer-to-peer lending sites.

2. Find training to improve your peer-to-peer lending education and understanding.

3. Use online organizations; compare peer-to-peer lending companies to find the right one for you.

Action Steps
The best contacts and resources to help you get it done

Learn the step-by-step of peer-to-peer loans

Investors want to feel as if they really know the person, so concise, accurate information increases their comfort in choosing to lend their money. When people or businesses place a request for peer-to-peer loans, there are certain inclusions on a loan application that can affect the number of responses received. Use reliable resources to discover how the process works.

I recommend: For social lending background information, see Investopedia. For foundational information with navigation tips, see SmartMoney. Cash Money Life offers a video explanation and more. For step-by-step instructions on how to use peer lending, go to eHow.

Attend training on peer-to-peer personal loans

Requesting, receiving and paying back loans are serious business. You want to seek all the training and information possible from people who know about finance. These professionals share their knowledge of the general process and system, and you learn details only people in the finance profession know. They teach you how to approach different scenarios for greater success.

I recommend: With several different methods of delivery and the option to customize your training, see Banker's Academy. Learn to Lend offers a free download of step-by step training courses.

Use organizations to learn what peer-to-peer lending companies offer

Several organizations participate in peer-to-peer lending. Use the resources below to investigate each one separately and make a list of the pros and cons, so you accurately compare the companies for the best match. Remember your lending organization is your business partner, so learn as much as possible about the financial details of peer-to-peer lending organizations.

I recommend: Uncrunch America, the effort to relieve America's credit problems, lists which companies supply different types of loans. LendingClub is a popular social lending organization that provides written and video education about social lending. Prosper explains options for loans and offers a tutorial to make a great listing.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Remember that peer-to-peer lending also utilizes collection agencies and reports to credit rating companies.

Peer-to-peer lending is gaining in popularity and it's often beneficial for both the lender and the borrower. With peer lending, borrowers can get lower rates than through a bank, while lenders often get a much higher return on their investment than they would from other investment vehicles.

Peer to peer lending sites help connect people who need money with people that have money to loan. In most cases, borrowers fill out an application that shows potential lenders their current debt to income ratio, credit score and a description of why they want a loan.

Lenders benefit from peer to peer loans by:

1. Getting a higher rate of return on their investment. While there is an element of risk with peer to peer personal loans, most people report overall success and the interest rates on their investments are higher than the usual CD or savings account rates.

2. Controlling the level of risk. Because you can view a borrower's credit score and other information, you can decide the amount of risk you want to take with peer-to-peer lending.

3. Feeling good by helping someone out. Sure, you want to get high returns on your investments, but it feels good to help others.

Action Steps
The best contacts and resources to help you get it done

Get your feet wet with pooled lending peer to peer loans

In pooled lending, you contribute your money to a pool of borrowers. This reduces the level of risk you take on because it is not likely that everyone you lend to will default. This is a good way to get started with peer to peer lending.

I recommend: At Zopa, you invest in a CD, but the money you pay into the CD benefits borrowers that need money. Lending Club allows you to distribute your money among many borrowers to reduce your risk.

Use peer to peer lending companies that offer direct lending

Some companies allow you to lend money directly to the borrowers. In these cases, it's your responsibility to decide whether you think that the borrower is likely to repay your loan. You have a bit more control over your money in these cases.

I recommend: At Prosper, you can browse the portfolios of borrowers and decide whom you want to loan your money to. Kiva focuses on lending money to people in impoverished nations to help them start a business. They do not return an interest rate, so view this as a type of charity, not an investment.

Consider peer to peer mortgage lending

Many peer to peer lending companies have a cap on the amount of money someone can borrow and it's not usually enough to cover the costs of a mortgage. Use a site that specializes in larger loans.

I recommend: Virgin Money allows friends and family to help with peer to peer mortgage lending. GreenNote helps to facilitate student loans. Both sites help protect family members that loan you the money.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Many borrowers come to peer to peer lending with bad credit. It's up to you to minimize the risks faced by borrowers defaulting on their loans. They best way to do this is by diversifying the money that you loan. Instead of giving $1000 to one person, give $100 each to 10 different people.

Peer-to-peer lending is a popular option because it humanizes the money lending and borrowing experience. Rather than simply basing a decision on a credit score, in peer-to-peer lending, the borrowers are able to give more detail about why they want the money, which means that loans are also based on personal character. Interest rates are often attractive to both lenders and borrowers, and social lending sites also allow lenders to participate in microfinancing.

Action Steps
The best contacts and resources to help you get it done

Social lending

Social lending is another way to say peer-to-peer lending. It's a way for regular people to borrow month from other people, rather than through a bank or lending institution. Lenders get a return on their money, which is often higher than other types of investments.

I recommend: Social Lending Network talks about social lending and shows a pie chart that breaks down the reasons that people take out loans through peer-to-peer lending.

Microfinance

Microfinance is the lending of money to the poor. Typically, richer nations and people provide small loans to poor people in third world countries. The amount of money is small by first world standards, but it helps the person to start a business to earn a regular income. Interest rates for lenders are either low or non-existent, but it's a way to use your money to make a distinct difference in someone's life.

I recommend: Kiva specializes in peer-to-peer microfinancing and has a good explanation on their site.

Interest rate

The interest rate is the additional amount that must be repaid with the loan. This varies depending on an individual's credit score. However, in peer-to-peer lending, the interest rates for the borrower are often much lower than the rates they would get from a bank. For lenders, the interest that they receive on their money is typically higher than what they would receive through alternative investments. It's a win-win situation.

I recommend: Lending Club, a peer-to-peer gateway, describes interest rates and how they determine the interest rate that a borrower receives.

Family mortgage

Most mortgages are too large to get a peer-to-peer loan. However, if a family member wants to loan money for a mortgage, some peer-to-peer companies can set this up to ensure regular collection of money. This is called a family mortgage, and gives the lender the opportunity to help their family and the borrower often gets a much lower interest rate than what they'd get through a traditional mortgage.

I recommend: Virgin Money facilitates family mortgages and explains what they are on their website.

Credit grade

A person's credit report contains personal information that they may not want to share with the world. Credit grades are a way for peer to peer lending companies to rate borrowers, giving lenders an idea of how risky the investment is. Those with good credit may receive a credit grade of A, while someone with bad credit may receive a C or D.

I recommend: Prosper describes how the credit grades they give match up with credit scores.

Diversification

When investing money, it's important to diversify your investments to prevent significant losses. Similarly, with peer-to-peer investing, you want to diversify funds over several different borrowers. That way, if one person defaults on a loan, you do not lose all of your money.

I recommend: FinAid Page includes details on diversification under the section "Advice for Lenders."