Person-to-person lending online gathers steam

Services match up borrowers with lenders, avoiding traditional banks.

Social lending has been around since the days when needy families turned to the richest man in town, but the Web is breathing new life into the practice. Loans on Prosper and Facebook’s LendingClub is rising. By 2010, the report forecasts $1 billion in peer-to-peer loan originations.

The idea behind the sites is that borrowers can find better rates than traditional banks offer, while lenders can earn higher returns than investment. Borrowers on Prosper post how much money they need, the purpose of the loan and what interest rate they can afford. Lenders bid on the loans of their choice, typically funding only partial amounts and diversifying their risk among hundreds of loans.

The opportunities for social connection appeal to users and lenders enjoy the satisfaction of seeing their money help someone in need. Each Prosper borrower is assigned a grade based on their credit score to help lenders evaluate their risk and the site verifies borrowers’ identities. Prosper reports late payments to credit bureaus, you have to keep up with these payments just as you would with any other financial obligation.

It are the borrowers who are crucial to the future success of peer-to-peer lending. As soon as you put $10,000 out there to 10 people and six do not pay you back, would you want to do it again?

I think this is very good for both lenders and borrowers and you can diversify your risk by funding little amounts to several different people.

Kathleen

Source : http://www.msnbc.msn.com/id/21993720/