A peer to peer loan is a loan funded by individuals rather than commercial lending institutions, and as such, it is an unsecured loan. With this type of loan, no collateral is involved. It is based simply on one's pledge to repay the money. In the United States The Lending Club and Prosper are the primary leaders in peer to peer loans and investments. Peer to peer lenders who avail themselves to the services of these two companies are essentially investors in the loans presented by The Lending Club or Prosper.
Anyone can join these organizations and become a peer to peer investor with a minimum initial investment of per loan, and there are hundreds of loans from which to choose. When an investor selects a loan, he or she has a security interest in that particular loan, and details concerning this interest are explained in the prospectuses for both companies. Prosper fees and Lending Club fees will also be outlined in the prospectus.
Prospective borrowers must be qualified before obtaining a loan, and this process is similar to that which one would go through for a traditional bank loan. Borrowers are evaluated by an internet bank based on aspects such as their current income, credit score, and ability to repay the money.
Investors in such arrangements must keep several things in mind: loans acquired through companies such as The Lending Company and Prosper are associated with fairly high fees and rates of interest. This means that the amount one is required to repay may be higher than for a comparable bank loan. For this reason, many of the borrowers who seek loans at such companies are most likely doing so because their credit is not good enough to secure a lower interest rate from a traditional lending institution.
When one applies for a loan, the investors review his or her financial history, and borrower is often asked to respond to certain questions. The borrowers should have an explanation of why the money is needed, but objective data such as their credit score and debt to income ratio should also be taken into consideration during the process of deciding on the types of loans in which to invest. Investors, not being professional loan officers, should use caution in attempting to discern which individual borrowers are most creditworthy, unless they are relying on purely objective data. A story, no matter how compelling, simply cannot be verified in this setting. Proceed with caution when agreeing to invest any sizeable sum in any given loan.
The Lending Club and Prosper make the selection process simple by offering investors the option of pooled loan investments. Most investors consider this the least risky of all the selection methods.
Borrowers make their payments on their Lending Club loans and Prosper loans a monthly basis, and investors receive monthly payments as well, which include both the principal and interest on the original amount of the loan. It is an automatic process run by the internet bank.
Lending Club investments and Prosper investments are essentially simple, provided the prospective investor educates himself or herself about each company before joining. can offer a great return on one's initial investment, as long as he or she understands the risks.