Peer-to-peer lending is when a person invests directly to an individual who sets the rate they'll give you for borrowing that money. No banks are involved, just an internet company to facilitate the transaction.
For a long time Nansee Parker has dreamed of opening a motorcycle shop with her mechanic husband.
"Sometimes you get comfortable in your job and you don't think about that bucket item list," Parker said.
When the recession hit, Parker thought it was the perfect time to start the business. She needed to quickly get a loan so she turned to peer-to-peer lending.
"In the olden days, small banks loaned to mom and pop shops, this is the modern day small bank which is in the interweb," Parker asid.
Person-to-person internet sites like Prosper and Lending Club take out the middle man and expedite the loan process. Potential borrowers apply online and get qualified in just a few days. Individual lenders can choose to invest as little as $25 and as much as $30,000.
"I wrote an essay of why I needed the loan, kind of some background on the business," Parker said
In 13 days Parker raised $20,000 from 225 anonymous investors from Hawaii to Rhode Island.
Scott Sanborn is chief marketing officer at Lending Club.
"In the last year the business as a whole is up about 125 percent year over year," Sanborn said.
In fact, as of March 2011 Prosper and Lending Club have made 63,000 loans totaling approximately $475 million.
Lending Club and Prosper claim the average investor is able to net just over 9 percent on their portfolio of loans.
"I typically invest in refinancing credit cards, consolidated debts, then home improvement loans, renewable energy loans and my particular favorites are wedding expenses and vacations," peer-to-peer investor Indra Singhal said.
Two years ago, Singhal first invested about $5,000 in several peer-to-peer loans but he's had such success that he now invests about $65,000 in 1,500 different loans.
But it is important to understand the risks. As in any personal loans not backed by collateral, lenders risk losing their principal and interest on their investments. And borrowers face risks typical of consumer lending like unfair lending and collection practices.
That said, Parker is thankful for this new type of lending.
"We bailed out the banks, the banks tightened their lending practices, we're not going to grow the economy by not lending," Parker said.
Now its not just big banks that can get big returns and borrowers with good credit have access to cash that had previously dried up.
