Best Online Loans

A new form of investment has risen from the ashes of the Global Financial Crisis of 2007. Because of that crisis, banks tightened their belts when it came to lending thus leaving many out in the cold when they needed a small loan to make a major purchase, start a business, or consolidate their debts.

This new form of investment is called peer-to-peer (P2P) lending and it allows those with money to avail funds to those seeking a loan while benefiting from the interest. It is a new way to invest and it sounds easy but you have to know what you are doing before you offer to lend a significant amount of money to typically high-risk borrowers. Here are some sources and tips so you can begin to lend money for interest.

Online Lending Sites

There are several online websites where you can sign up as a lender and begin considering requests for loans from the borrowers registered on the same. Two of the most popular online lending sites are LendingClub.com and Prosper.com. There are others just starting but these are the two giants in the industry.

Lending Club

This P2P social lending site is reported to have returns between 9% and 10%. Most of the borrowers coming to Lending Club are looking to pay off existing credit card debt or do debt consolidation. Borrowers are seeking to convert their variable rate credit card loans into a fixed rate loan that they can pay in three years. Of course there are other reasons borrowers come to Lending Club but this seems to be the majority of cases. Reviewers of this site say they have great tools for lenders to do portfolio analysis which makes it easier to fund many loans thus reducing risk.

Prosper

Prosper reports an average return of between 6 and 16% on loans but in reality most are getting between 9 and 10%. Prosper is easy for a lender and there is minimum investment amount of $25 on a loan to fund. This low minimum investment amount also allows lenders to safely spread their risk. Their loans are at fixed rates and have a term of 3 years.

Tips for Reducing Your Risk

What you as a lender have to watch out for is the fact that most of the people you are lending to have sought you out because they don’t have good credit. In some cases, their credit is okay but not good enough for the banks to consider them for a loan. Thus, the likelihood of default is very high. If you are lending to your friend, you probably know that person’s credit situation already. If you are lending through one of the social lending sites, you can be reasonably certain that the stranger petitioning you for a loan has a bad credit history or cannot qualify for a traditional bank or credit union loan.

P2P lending sites allow you to choose the amount you want to lend. They then gather all the amounts from different lenders until the amount reaches what the borrower wants. By choosing to fund only a portion of someone’s loan petition, you can spread your risk throughout a portfolio of loans rather than putting everything into one. For example, instead of funding someone’s $5,000 loan in full, you can choose to maybe contribute only $100 towards it. This way, if the person defaults, you are only out $100.