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You've Got a Friend

You've Got a Friend

The practice has been around since 2005, but person-to-person (P-to-P) lending really began to take off in the economic downturn. When you have people with money looking for better rates of return than the banks are offering and people who need a loan but can't go through their bank, the two together form a pretty strong business market. Companies like Prosper, Zopa and the Lending Club are companies making such transactions possible (note: Lending Club is not accepting new applications for borrowers or lenders at this time while they sort through some regulation issues).

In case you've never heard of nice people loaning money to other nice people, it works something like this. As a borrower, you can post how much you need for what and the interest rate you're willing to pay. The host company does a credit check and then assigns you a risk grade based on that score. There is, of course, a verification process to ensure that you are who you say you are. Then, lenders will place bids to loan you money. Most lenders don't give the entire amount to one individual because there's still some risk involved for them if you default. So, multiple lenders will bid to spread the risk out. Once you've secured your asking loan amount, the company deposits the money into your account and then will collect payment each month and distribute the funds accordingly to the lenders.

It's certainly an interesting concept. What do you think, though? Is this something you would consider, as either a borrower or a lender? [Bankrate]

Posted: 6/6/08