Hate Banks? Get Loans from Your Friends Instead

Peer to Peer LendingRemember Kazaa?

Hopefully you didn’t get arrested because of it, but if you’re over the age of 19 you probably remember how it works. People upload files and share them with you – be it video, music, or whatever.

There’s a new craze in lending that’s more or less the same thing: peer-to-peer lending. This type of lending is exactly what it sounds like: if you need a loan, you place a profile on websites such as LendingClub.com or Prosper.com asking for a loan.

A profile includes such information as credit score, location, and even your educational level. Then, ‘investors’ (your peers, not banks) are given the opportunity to look over different profiles and choose which borrowers they would like to invest in. The riskier the borrower’s profile, the higher interest rate the borrower will pay. Likewise, the investor will earn more interest on riskier loans.

It’s neat, right? Instead of bank executives reaping the profits from your loans, normal people – just like you – are the ones who profit off of your loan. Of course, the peer to peer lending sites takes their cut, but the actual financing is done directly by… well, your peers.

But before you try to pay for your entire college education with these loans, be aware of their limitations. The amount of the loan is usually small – a ceiling of $25,000 is typical – and interest rates hover around 12 percent. And don’t try to start out your credit history with a peer-to-peer loan. Getting a loan on such sites isn’t easy – LendingClub, for example, approves only around 10 percent of loans and Prosper requires a credit score of over 640 to be eligible for a loan through their sites.

Still, there are plenty of qualified young adults who could benefit from peer-to-peer lending, for all ranges of things – furnishing an apartment, buying a car, or paying off high-interest credit card debt (a very popular – and smart – choice).

So what do the lending sites think about young people using these loans? They like it. I got in touch with Renaud Laplanche, CEO of Lending Club, who agreed that “for many young people, investing and borrowing can be intimidating. They are looking for an alternative to the big banksYoung investors find Lending Club attractive because they get great returns and total control and transparency as to where their money is being invested. It is a very refreshing approach compared to the big banks.”

Refreshing, indeed.

Nick Farina is a recent college graduate and writer of the Money in English blog. He has also written for AOL and CreditCards.com, and serves as a consultant to the City of Chicago Treasurer's Office.

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