If you haven’t heard about the peer lending revolution yet, you soon will. Both companies in the space, Prosper and Lending Club, are issuing more than $100 million in new loans every month.
The revolution in peer lending is opening a new world to investors but many are being caught off guard. Know the risks and resources before investing in online loans and you might just find one of your favorite investments.
Peer lending is taking the power from big banks
The first peer loans were made on Prosper nearly a decade ago but the movement has only just begun to gain momentum over the last year. It took Prosper over eight years to originate a billion dollars in loans. It took the loan platform just six months this year to originate its second billion.
Peer lending is the coming together of the online world and traditional lending. Borrowers fill out an application for up to $35,000 on a lending website, either Prosper or Lending Club in the United States. After a credit check and review, the application is assigned a credit rating and an interest rate.
The loan request then goes live on the website for investors to fund. Investors decide how much they want to fund in a particular loan, as low as $25, and in how many loans they want to invest. Once enough people choose to invest in a loan and it reaches its requested amount, the money is deposited in the borrower’s bank account.
The borrower makes regular payments to the lending website, as with any loan, and the website passes payments on to investors. The concept is nothing new, people have been investing in bank loans for ages but they’ve always had to go through the bank or a brokerage firm.
Peer lending is changing all that and connecting borrowers with investors directly. [Read more…]