{"id":64752,"date":"2011-02-01T04:00:10","date_gmt":"2011-02-01T11:00:10","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=64752"},"modified":"2019-11-28T01:54:08","modified_gmt":"2019-11-28T09:54:08","slug":"a-brief-intro-to-peer-to-peer-lending","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/a-brief-intro-to-peer-to-peer-lending\/","title":{"rendered":"A brief intro to peer-to-peer lending"},"content":{"rendered":"<p>Lately, I&#8217;ve heard a lot of buzz about how peer-to-peer (P2P) lending is a great alternative for investors who feel burned by the stock market. Proponents of peer-to-peer lending say it&#8217;s a smart way to get a good return on your money without the risk of a failing economy. But before you pull up stakes in your <a href=\"https:\/\/www.getrichslowly.org\/are-index-funds-the-best-investment\/\">index funds<\/a> and hightail it for the nearest P2P lending site, let&#8217;s take a closer look at the pros and cons.<\/p>\n<div class=\"highlight\"><em><strong>Note:<\/strong><\/em> Over the weekend, Trent at The Simple Dollar also <a href=\"https:\/\/www.thesimpledollar.com\/loans\/business\/understanding-peer-to-peer-business-lending\/\" target=\"_blank\" rel=\"noopener\">offered his thoughts<\/a> on peer-to-peer lending.<\/div>\n<h2><span class=\"ez-toc-section\" id=\"a-brief-intro-to-peer-to-peer-lending\"><\/span>A Brief Intro to Peer-to-Peer Lending<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In its oldest, simplest form, peer-to-peer lending is what happens when you loan your mom money to start her new hairdressing business, or borrow funds from a friend for a down payment on your new truck. You&#8217;re making or taking the loan based on your relationship with the person, which counts for more than their credit rating or collateral.<\/p>\n<p>Sometimes loans to friends and family work out well, but often they don&#8217;t. They&#8217;ve funded many dreams, but they&#8217;re also famous for breaking apart families and friendships that have stood the test of decades. An old saying goes, &#8220;Never loan money to friends. You&#8217;ll lose your money <em>and<\/em> your friends.&#8221;<\/p>\n<div class=\"highlight\"><em><strong>Reminder:<\/strong><\/em> Last week, April shared tips on <a href=\"https:\/\/www.getrichslowly.org\/how-to-lend-money-to-friends-without-ruining-the-relationship\/\"><strong>how to loan money to friends and family<\/strong><\/a> without ruining the relationship, and 150 GRS commenters added their tips to the discussion.<\/div>\n<p>In its modern incarnation, peer-to-peer lending has gone online, where it&#8217;s become a big business. Third-party websites match lenders to borrowers, in an attempt to make both parties feel more at ease.<\/p>\n<ul>\n<li>Borrowers at peer-to-peer lending sites get better interest rates and loan terms than they would from a commercial bank. The lending sites will only work with you if your credit score is in the mid-600s or higher, but the terms you&#8217;ll be offered are better than most banks.<\/li>\n<li>As a lender, you get to know something about the borrower before you lend your money, which builds trust and feels good. But if the loan doesn&#8217;t work out and you lose your cash, at least you don&#8217;t have to face the deadbeat over Thanksgiving dinner every year for the rest of time.<\/li>\n<\/ul>\n<p>Peer-to-peer lending has gained a lot of attention because of its purportedly fabulous returns. <a href=\"https:\/\/www.getrichslowly.org\/go\/lendingclubinvestor\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Lending Club<\/a> is advertising investor rates of return in the 9% range. <a href=\"https:\/\/www.getrichslowly.org\/go\/prosper\" rel=\"nofollow\">Prosper<\/a> says their returns are slightly over 10%. That&#8217;s an order of magnitude better than the return I&#8217;m getting on my <a href=\"https:\/\/www.getrichslowly.org\/best-online-high-yield-savings-accounts\/\">savings account<\/a>. Where can I sign up?<\/p>\n<h2><span class=\"ez-toc-section\" id=\"the-complete-idiots-guide-to-peer-to-peer-lending\"><\/span>The Complete Idiot&#8217;s Guide to Peer-to-Peer Lending<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To learn more about peer-to-peer lending, I recently interviewed Beverly Harzog, co-author of <a href=\"https:\/\/www.amazon.com\/dp\/1592578829\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em>The Complete Idiot&#8217;s Guide To Peer-to-Peer Lending<\/em><\/a>. She had some words of caution before I chase after this pot of gold. <strong>Peer-to-peer lending can be great, she said, but it&#8217;s not without pitfalls.<\/strong><\/p>\n<p>&#8220;It&#8217;s very risky. It&#8217;s like investing in the stock market. Everybody may have great intentions, but when you&#8217;re lending this money, you have to be prepared to lose it,&#8221; Harzog said.<\/p>\n<p>Her bottom line: <strong>Don&#8217;t invest any money you can&#8217;t afford to lose.<\/strong> This might be a good investment, but it&#8217;s not an a sure-fire way to make a mint. It&#8217;s an at-risk investment just like stocks.<\/p>\n<p>Unlike in the stock market, you&#8217;re funding loans. The borrowers have a legal commitment to pay you back at the interest rate you agreed to. If they don&#8217;t, the website that set up the loan will pursue your funds through a collection agency. In theory, this should make these investments more secure than stocks, but Herzog warns that you can still lose your money.<\/p>\n<p>To combat that, she suggests lenders diversify their risks, <a href=\"https:\/\/www.getrichslowly.org\/investing-101-how-diversification-reduces-risk\/\">just as they would with stocks<\/a>. Don&#8217;t put $1,000 into one loan. Put $100 into 10 different loans. It&#8217;s unlikely they&#8217;ll all default, and you&#8217;ll earn a nice rate on most of your money that way. You can also choose to only partially fund a loan; when several people fund a single loan, everyone shoulders a bit of risk instead of one person taking it all.<\/p>\n<p>As another incentive, you&#8217;ll earn the warm cozy feel that comes from directly helping others. Harzog says this feeling of reaching out and helping is what draws many investors into peer-to-peer lending.<\/p>\n<p>&#8220;There&#8217;s an element of people helping people that&#8217;s just so appealing,&#8221; Harzog said. &#8220;It&#8217;s a very feel-good thing.&#8221;<\/p>\n<p>If you want to try peer-to-peer lending, Harzog strongly recommends sticking with the big sites like <a href=\"https:\/\/www.getrichslowly.org\/go\/lendingclubinvestor\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Lending Club<\/a> and <a href=\"https:\/\/www.getrichslowly.org\/go\/prosper\" rel=\"nofollow\">Prosper<\/a>. You can start out as a lender at Lending Club for as little as $100. That&#8217;s a low bar to entry for new investors. Harzog has seen a lot of smaller sites come and go, while the big ones now have enough gravity to stick around.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"creative-uses-for-cash\"><\/span>Creative Uses for Cash<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>There are some smaller sites worth noting, though. Some people are putting the basic concept of peer-to-peer lending to incredibly creative uses.<\/p>\n<ul>\n<li>Some sites, like <a href=\"https:\/\/greennote.com\/\" target=\"_blank\" rel=\"noopener\">Green Note<\/a> and <a href=\"http:\/\/people2capital.com\/\" target=\"_blank\" rel=\"noopener\">People Capital<\/a> specialize in funding student loans.<\/li>\n<li>At sites like <a href=\"https:\/\/www.kiva.org\/\" target=\"_blank\" rel=\"noopener\">Kiva<\/a>, you can help women in the developing world start their own businesses.<\/li>\n<li>At <a href=\"https:\/\/www.kickstarter.com\/\" target=\"_blank\" rel=\"noopener\">Kickstarter.com<\/a>, you can give money to creative projects ranging from film products to entrepreneurial gadgets. Kickstarter is more about donations than loans, but many of the Kickstarter projects offer a small return in the form of copies of the creative work produced, or your own personal widget when they get made.<\/li>\n<\/ul>\n<p>These creative sites might not offer the returns a big site like Lending Club does, but they&#8217;re fun, interesting uses of the concept. They let you participate for very little money. You can take $25 to Kiva or Kickstarter and invest it in someone&#8217;s new business. And at Kickstarter, you&#8217;ll get a funky wristwatch or a new folk album, depending on what you invested in. (J.D. helped fund <em>Kind of Bloop<\/em>, an 8-bit Miles Davis tribute album.)<\/p>\n<p>At this point, I&#8217;m intrigued enough by peer-to-peer lending that I&#8217;d like to try it. There&#8217;s just one catch: I can&#8217;t. At least, I can&#8217;t play with the big fish. Both <a href=\"https:\/\/www.getrichslowly.org\/go\/lendingclubinvestor\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Lending Club<\/a> and Prosper are only available to lenders in certain states, and I don&#8217;t live in one of the eligible areas.<\/p>\n<p><strong>Have <em>you<\/em> tried peer-to-peer lending?<\/strong> What was your experience like? Are you <em>tempted<\/em> to try it? If not, what holds you back?<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Lately, I&#8217;ve heard a lot of buzz about how peer-to-peer (P2P) lending is a great alternative for investors who feel burned by the stock market. Proponents of peer-to-peer lending say it&#8217;s a smart way to get a good return on your money without the risk of a failing economy. But before you pull up stakes in your <a href=\"https:\/\/www.getrichslowly.org\/are-index-funds-the-best-investment\/\">index funds<\/a> and hightail it for the nearest P2P lending site, let&#8217;s take a closer look at the pros and cons.<\/p>\n<div class=\"highlight\"><em><strong>Note:<\/strong><\/em> Over the weekend, Trent at The Simple Dollar also <a href=\"https:\/\/www.thesimpledollar.com\/loans\/business\/understanding-peer-to-peer-business-lending\/\">offered his thoughts<\/a> on peer-to-peer lending.<\/div>\n<h2>A Brief Intro to Peer-to-Peer Lending<\/h2>\n<p>In its oldest, simplest form, peer-to-peer lending is what happens when you loan your mom money to start her new hairdressing business, or borrow funds from a friend for a down payment on your new truck. You&#8217;re making or taking the loan based on your relationship with the person, which counts for more than their credit rating or collateral.<\/p>\n<p>Sometimes loans to friends and family work out well, but often they don&#8217;t. They&#8217;ve funded many dreams, but they&#8217;re also famous for breaking apart families and friendships that have stood the test of decades. An old saying goes, &#8220;Never loan money to friends. You&#8217;ll lose your money <em>and<\/em> your friends.&#8221;<\/p>\n","protected":false},"author":101,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[492],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/64752"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/101"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=64752"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/64752\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=64752"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=64752"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}