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How to Make Money with Peer to Peer Lending.

Updated on June 26, 2011

What is peer to peer lending?

A new money lending phenomenon has been growing over the past few years, which many view as a reliable investment avenue. P2P, or peer to peer lending, is a great resource for those trying to get a loan at a competitive rate or for those wanting to invest their money for a decent rate of return. In fact, I think it is one of the best ways to invest your money currently.

So, in the midst of this bleak economic climate, if you've been wondering how to make money, peer to peer lending is definitely worth your consideration. It isn’t risk-free, nothing is, but if you carefully choose borrowers with a good credit score and a low debt to income ratio then it is safe to say that you can easily expect a 7 to 9 percent return, which definitely beats current CD and bond rates and probably beats returns on your stock investing as well. But, if you aren't so risk averse you can also lend to a broader pool of borrowers and make even higher returns (15-20%), it all depends on your goals and comfort with risk.

Good Reads on P2P Lending

How do you make money with peer to peer lending?

You make money with peer to peer lending the same way that a bank does when they loan money - by collecting interest. The P2P process basically involves ordinary people loaning money to each other, replacing the traditional need of asking a bank or consumer lending company for a loan. It’s also known as micro-lending because any given loan is funded by many people loaning small amounts of money.

For example: if a borrower needs a loan for $5,000 then he/she would submit a loan request. Then, many different lenders would offer small amounts (around $50 each) until the funding reaches the $5,000 level, so you end up with 100 different lenders and one borrower. The lending works through a bidding process whereby each lender bids their money at a certain interest rate. This is great for the borrower because each lender will try to secure the loan by underbidding the other lenders, thus lowering the final interest rate. As a lender it is also an excellent arrangement because lending small amounts of money spreads your risk in case of a default on the loan.

So, if you have $2,000 in capital available to lend you loan it to, say, 40 different borrowers instead of 1 or 2 borrowers. This way, if a borrower defaults on a loan you are only out $50 instead of $2,000.

How to get started with peer to peer lending.

There are a number of these P2P marketplaces that you can choose from. I’ve used with great success and they're the largest. However, they recently entered into a registration process with the SEC in order to offer lenders the opportunity to sell bundled loans. This process doesn’t allow Prosper to accept any lenders at the moment, but I’ll update you when they are once again accepting new accounts. Lending Club is another that is similar to Prosper, but with less risk to lenders. The Lending Club only allows borrowers with a credit score above 660, which gives an added measure of protection to lenders.

I think the P2P lending phenomenon is a wonderful thing for both lender and borrower. It cuts out the dreaded middleman (the bank) and allows people to help each other out. If you need a loan peer lending makes it relatively easy to get one at a good rate. Or, if you want to make money peer to peer lending makes it relatively easy for you to earn a good return at a reduced risk. Lending Club has a very good FAQ section and a free Javelin study covering the performance of their lender's loans for those interested in investigating further.

Signing up as a lender allows you access to their site and their loan platform, which will give you a good feel for how the process works. Their signup form is easy - some basic questions about your personal information and bank account details. Don't worry though, this won't obligate you to transfer any funds. You can cancel immediately afterwards if you'd like, without any hassles.


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    • mulberry1 profile image

      mulberry1 6 years ago

      I have just started looking into this. It does sound like a reasonably good investment and borrowers benefit as well. Thanks for this intro.

    • Jordan Riley profile image

      Jordan Riley 7 years ago

      Fantastic hubpage you have provided

    • wandererh profile image

      David Lim 7 years ago from Singapore

      This is the first time I have heard of peer to peer lending. It is actually a logical idea, but what is to prevent borrowers from abusing the system by borrowing money and not returning it?