By lending money to others you have the opportunity to break out of the standard 2% or 3% and make far more. The approach is called Community Lending or peer to peer lending. The idea is that both the lender and borrower benefit as well as obviously the broker who handles the contract.
A potential borrower will request a loan amount and details of why they need the load and what it is going to be used for, the community will then have the opportunity to ‘bid’ on the loan and offer up a portion of the loan. Once the borrower has enough people lending him money the next steps can continue of getting the loan completed.
The business model behind this approach is that there are people out there that may not be able to go the traditional loan approach, there credit scores may be low and banks will not lend to them, this is just one typically reason, there are lots of other scenario where going to a community to borrow money is quicker and takes the hassle out of dealing with banks.
The number one issue that you should take away after reading this article is that there is obvious risk involved in this lending approach. The Risk can be somewhat controlled, but if you are looking for the safest return on money and do not have any appetite for any risk then this may not be the approach for you.
To break down the process into more detail we can look at one of the more popular website for this community lending. Prosper.com
A borrower will register with the website, they will need to register a request for a loan and enter information based on their financial situation and provide proof. There credit is scored and this is shown to the lenders by a ranking system.
The higher the borrowers credit risk, the higher the interest rate. The website will provide guidance on average interest rates for rank, so a bad score will typically command interest around the maximum of 35%, while an AA ranking will produce a typical 8% starting bid.
These guidelines do not have to be used, but if you have bad credit and want to borrow $1000 at 5% you will not get any bids on your request unless you have some other explanation that you can ‘sell’ to the lenders.
From the lenders side, you will see all these loan requests and you can then make a decision on how much you want to bid and the lowest interest rate you are willing to pay. This is important as once the loan has received enough bids to complete the loan the bidding process will continue until the end date, the date is 1 week from creation.
The goal for a borrower is to get your loan bid down to a lower rate then originally asked. If there is enough interest and have a great reason for the need and likelihood that you will repay then your chances will improve.
The lenders will see the financial situation of the borrower and have the week to ask questions to the borrower. The loan is typically over 36 months, you will receive payment each money and money will be deposited back into your account, but you should note that if you need your cash quickly then this may not be an option for you. The profile of a lender is someone that has excess cash that want to try and earn more then the standard investment rates out there.
The website will make there money by charging the borrower as well as the lender transactions feeds. The details are clearly posted as well as other helpful tips and documents.
Do not rush into this type of lending until you fully understand the process, there are good resources out there on the web and very detailed information on how the system works.