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INVESTING IN PEER TO PEER LENDING

Peer to peer lending is an exciting new phenomenon. For the first time lenders can efficiently find borrowers that are looking for personal loans without having to go to a bank. This efficient process benefits the borrower by giving them an additional way to secure a personal loan without having to meet strict bank restrictions. The lender benefits by being able to take on the role of the loan officer at the bank and deciding which loan they wish to fund, and being compensated with a higher interest rate for their effort.

The efficiency of P2P lending is what brings down the cost to the borrower and lender and allows both parties to benefit from lower interest rates than a bank can offer. These low interest rates make peer to peer lending attractive to borrowers. While at the same time appeal to people who are looking for a greater return on their investment than they can receive in their bank account.

Just like with any other transaction the fewer parties that are involved the more efficient the process becomes. The fewer amount of hands that need to see a return lower the cost of the transaction and benefit the parties that are still involved in the transaction. In this case people can see how both parties are equally benefited from the removal of the bank's part in the process.

Bank's will continue to dominate the personal loan market. However, as time moves on peer to peer lending will become a larger part of the personal loan market. As borrowers become more aware of ways to achieve a lower interest rate on a loan they will turn to p2p lending before they turn to the bank.

Investing with peer to peer lending is a fairly new concept, providing many benefits for the investor. This type of investing has become an alternative way to invest money because banks are no longer involved, giving the investor a better return on their money. Here are the top 5 reasons why someone would want to invest their money using peer to peer lending.

1. Knowing exactly where your money is being invested

Peer to peer lending, or p2p lending for short is gratifying because you are investing in other people. Your money is being used by other people who are trying to improve their lives, whether it is through getting out of debt, funding a business or using that money to improve their home. Each borrower has a story, and based on that story, you can choose a borrower that you can relate to or just want to help out.

2. Begin investing with just $25

If you have at least $25 to invest, then you can start investing in peer to peer lending. This is unlike many banks and mutual funds, where you have to invest hundreds or thousands of dollars to get started. With p2p lending, you can invest in lower increments of money, getting you an investment account a lot sooner.

3. CD's remain to pay less than 3%

Even though CD's are protected and insured by the FDIC, you are likely to lose money due to inflation if you were to get a five year CD right now. Currently, according to bankrate.com, the maximum return is 2.61%, with 2% for a three year CD. If you are trying to grow a nest egg, investing through a CD will not be very effective.

4. You get true diversification in your investment portfolio

It has been said by financial planners that diversification is an essential aspect to investing. P2P lending helps provide just that. You are investing in a complete different asset class, consumer credit, as asset class that is not available in most traditional investments. In 2008, almost every asset class lost value, making investing traditionally a bigger risk. With peer to peer lending you are adding more diversification to your investment portfolio.

5. You don't have to deal with Wall Street or banks

We all know how the big banks and financial institutions on Wall Street were the main cause of the financial crisis that everyone has been affected by. By using peer to peer lending, you can completely avoid using these institutions and get a better return on your money. Your money is in better hands with p2p lending, rather than in the hands of institutions that made poor decisions and showed a high level of greed with other's hard earned money. With p2p lending you are in control.

Martha wanted to buy a new car when her old Rover gave way and required about $2,500 to buy the one she liked. Her bank offered her a loan at a shocking 29% for $2,500 for a loan term of 4 years. This was way beyond her means. As she enquired among her friends for a more feasible loan rate, she came across social lending and decided to give it a try. Within the next three weeks she had got the much wanted loan at 15% which she could easily payback in the next five years. How does P2P lending manage loans at reasonable rates and that too for borrowers with not so perfect credit rating? It does so by cutting out middlemen with their huge overheads and big margins.

How does peer to peer lending work?

Most social lending marketplaces function on the eBay model where borrowers and lenders work out a loan without recourse to a third party. The borrowers' loan requests are listed on the online platform, indicating the required amount, interest rate and the duration of the loans. Lenders place bids on the loan listings which suit their investment criteria after sifting through hundreds of borrowing requests. The borrowers' online profiles can provide their financial strengths as well as responsibilities including their monthly income and expenses. Most sites get the borrowers' creditworthiness assessed through their credit scores as well as various other parameters like calculating their DTI ratio, their stability and affordability scores etc. Most social lending websites offer lending amounts up to ??25000 for duration of 1 to 5 years.

Who can join P2P lending sites?

The registration procedure for most social lending sites is quick and easy to comply with. You can apply as long as you meet the minimum application criteria. Borrowers can request for a loan for a plethora of reasons including debt consolidation, marriage, traveling, surgery, business, house repairs and student loan. Providing an authentic explanation of why you want the loan and how you intend to pay it back as well as a few indicators on your stability and reliability as a borrower can go a long way in getting your loan funded. However, you can choose to be discreet about your personal and financial information by using your privacy settings on your profile.

What is the plus of peer to peer lending?

P2P lending endeavours to build an online community for timely and affordable financial help to people turned down by traditional lending institutions for a number of reasons. It attempts to assess the creditworthiness of the borrowers through more than just their credit scores. Being online, their service charges are low and access is much easier. It can also be instrumental in helping borrowers build a healthy credit history for the future by making timely repayments on their loans.

In the process, peer lending can generate tangible benefits for real people on their hard earned money rather than for impersonal institutions like banks. Moreover, it also diversifies the risk quotient involved in unsecured lending by spreading the money over a number of borrowers. Obviously, lower risk markets generate lower returns while higher risk categories will give higher returns. Recently, a few social lending websites have launched a secondary market for loans to improve liquidity and investment options for the lenders.

Some peer to peer lending sites

Zopa and Prosper pioneered peer to peer lending in the UK and US respectively and have already created a sizeable place for themselves in the social lending scenario. Communitylend, too joined the P2P lending network in Australia. In the UK, a number of social lending platforms such as YES-secure, RateSetter, Quakle and Funding Circle have been launched in 2010.

In nutshell, if you find it difficult to fulfill the legal obligations set by the banks or would like to avoid the tedious transactions with traditional financial institutions, P2P could be the right option for you. It might be the way to a quick, easy and affordable loan you have been dreaming about
With the advent of peer-to-peer lending websites such as Prosper.com, it may seem as though a new era in online lending is beginning. As with any loan, however, it's important that you take the time to look into the advantages and disadvantages of this type of loan so as to make sure that you know exactly where your money is coming from and what will be expected of you when it comes time to pay it back. Even though the loan doesn't come from a bank of major lender, a peer-to-peer loan is still a debt and the repayment of such a loan should be considered a serious matter.

Is it right for you?

Before you start looking at whether peer-to-peer lending is right for you, you should first make sure that you understand how this type of lending service works. After creating an account with the lending site, you can either make a listing for a loan that you need or you can search the listings and find loans that you are willing to contribute to.

Loan requesters list the amount that they want to borrow, the interest rates that they're willing to pay, what the loan will be used for, and a little bit about themselves in order to show why they need the money. Loan contributors don't have to supply the full amount of the loan, just the portion that they're willing to pay. Multiple contributors can pay into a single loan, and once the requested amount has been reached then the borrower will have the full loan deposited into their checking or savings account.

Advantages

One of the main advantages of peer-to-peer lending is the fact that it doesn't require a bank or other major lending institution to be involved. The money that you borrow is supplied by private individuals just like yourself, who fund part or all of your loan and who receive interest from your loan payments. Of course, you don't have to have direct contact with any of the individuals who contribute to your loan... the peer-to-peer lending service acts as a proxy, with the site handling all loan payments with direct deposits and withdrawals. This is how multiple lenders can be used to fill your loan needs, with the payments that are automatically withdrawn from your bank account being divided up among them each month.

It's even possible to make money through a peer-to-peer lending service, provided that you have the money to invest into it. You'll be making interest on any money that you lend, minus any service fees that are taken out by the service itself. Unfortunately, unless you have a decent amount that you're able to invest into funding loans the amount that you make likely won't be significant.

Disadvantages

This type of lending isn't without its disadvantages, however. Since the money that you borrow isn't supplied by a bank or other federally-insured lender, in the rare event that there was some problem then you may not be able to recover your losses. Additionally, if you aren't able to get enough people willing to invest in your loan then you might not be able to receive the entire amount that you need.

Because of the different advantages and disadvantages, peer-to-peer lending isn't right for everyone. Some people may have good experiences with this sort of loan, especially if they are only wanting to borrow a small amount or haven't been able to get a loan elsewhere. Those individuals who have better credit or who have equity that they can use to secure a loan would likely be better served with a more traditional loan, however.

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