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.
Get your feet wet with pooled lending peer to peer loansIn 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.
Use peer to peer lending companies that offer direct lendingSome 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.
Consider peer to peer mortgage lendingMany 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.
- 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.