Wednesday, July 2, 2008

Why should I turn to peer to peer lending?

There has been so much talk in the past two or three years about peer to peer lending and its advantages and disadvantages. We’ve talked to countless people on both ends of the equation and have found the advantages overwhelmingly outweigh the disadvantages. There has been chatter that this is going to be the next big movement in the world of finance and a great way to help someone out and make a bit of cash on your own. Here are a few reasons why you should consider this emerging financial resource:

  1. The lenders have great flexibility. As a lender you’re not making the loan, rather you are purchasing a part of the loan. You can get into a loan for as low as $25-$50. Accordingly, you can limit your risk by creating diversity through the purchase of many different loans. Prosper will put the loan out for bid and when there are enough lenders the loan is granted.
  2. It’s a win-win situation all around. Everyone makes out in the peer to peer loan experience. The lender can sometimes see a turnaround of up to 15% on their investment. The borrower is granted the loan they were seeking and usually pays smaller interest than on a loan from bank because there is less overhead involved. A company like Prosper makes money as it takes a small percentage of the loan cost. Doesn’t this sound refreshing compared to the sour taste left in people’s mouths when dealing with the banks?
  3. Lending is making you the bank. As the lender you are the bank and you get paid for taking the risk of lending money to a borrower. As you begin to get paid back you can choose to spread your money to new loans or you can simply withdraw your money. There is more risk involved in peer to peer lending than a guaranteed investment like a CD, but you can diversify your loan across risk classes and have a better chance at seeing a greater return.
  4. Peer to peer lending is here to stay. This emerging market has enticed investors from all different walks of life and financial backgrounds. As we’ve already discussed there is risk involved, slightly more than stable money markets but you can also see your small investment grow. Prosper has been advertising that the average return is between 8 and 12 %.
This guest post was contributed by Heather Johnson, who writes on the subject of amex canada.

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