P2P Lending - Prosper.com

If you don't already know, P2P Lending is People-to-People lending...or borrowing. P2P is also known as peer-to-peer.

The way it works is that people can borrow, or lend money without the involvement banks or credit cards, from other people. Hence, people to people.

As a lender, you invest in a portfolio of loans that earn a higher yield than cd's, money markets or savings accounts. Lenders are encouraged to diversify their loans by making loans in increments of $50 or $100 spread among different borrowers. For instance, if you wanted to loan $5000, you would make fifty $100 loans to fifty different borrowers. The risk is less since you have $5000 out to 50 different borrowers vs. $5000 out to a single borrower.

Lending money at any of these sites has its risks. First, the loans are unsecured and second, there is no way to know if the borrower is being truthful about his listing. But, even if 2 or 3 $50 loans default, with the rest of your $5,000 out at over 13 or 14%, your return is still very good.

All of Prosper loans have a three year term with no prepayment penalty. Borrowers post a listing with a brief explanation as to their request for a loan. Most of the listings seem to be folks who have gotten in over their heads with credit card debt or student loans.

Listings include a summary of the borrower's credit report and a credit rating. Lenders can create specific searches based on credit rating, area, or a number o f other filters. Prosper also allows lenders to set up automatic loans to borrowers that meet specific criteria customized by the lender.

It's an interesting concept that has the potential to be a win-win situation for both lenders and borrowers.