Peer-to-peer lending originally meant a way for individual lenders to fund loans for individual borrowers. The two most well-known sites in the U.S. are Prosper and Lending Club. In the early years of these sites, most of the loans were truly funded by individuals. However, the industry has now evolved to a point that most of the loans get funded by large, well-capitalized financial institutions. The new term for the the industry is “marketplace lending”.
Marketplace lending provides benefits for both the borrower and the investor. The majority of borrowers are using the loans for “debt consolidation”, which probably means they are paying off credit cards with very high interest rates. The rates that borrowers get from Prosper or Lending Club are not cheap – they are typically between 10 and 20 percent APR. However, they are considerably cheaper than credit cards that charge north of 20% APR.
It should be noted that the industry is relatively new. The large marketplace lending sites began operations after the credit crisis of 2008-2009. Thus, the industry has existed only during the past six years, in which the economy was recovering and interest rates were extremely low. As a whole, marketplace lending has not been tested by negative economic conditions.
So far I’ve written a review of my experience as a lender on Prosper.com, which can be found here.