Q: Can you tell me if these "peer-to-peer" lending Web sites are legit? - Cameron
A: The Internet has spawned many "peer-to-peer" networks, starting with Napster back in 1999. In general, peer-to-peer (P2P) networks allow any peer (or person connected to the Internet) to exchange or interact with any other peer.
P2P networks exist for music, video, sewing patterns, recipes and now for lending and borrowing money.
The concept of lending money via the Internet evolved from the successful use of micro-lending in Third World countries (www.kiva.org). Loans as small as $25 were capable of helping entrepreneurs in those countries get a start in small service businesses.
The P2P lending concept (also known as person-to-person lending or social lending) took it to the next level, which was to get many folks that were willing to invest $25-$100 to pool their investment capital to fund larger projects.
You can seek funding for everything from student loans to paying off credit cards to home improvements to small business loans. Virtually any borrowing need that in the past required a traditional lender is possible via P2P lending sites and usually in a much shorter period of time.
Today there are two distinct ways to use these Internet lending sites: to create a structured loan program to pitch to your friends and family or to pitch total strangers for funding.
Think of these sites as providing the same service that eBay provides: an online way to get buyers and sellers together. P2P lending opens up opportunities for borrowers and lenders of all types anywhere on the Internet to connect.
As with any lending situation, there are pros and cons for both borrowers and lenders.
Borrowers will likely pay a higher interest rate or be required to secure the loan in ways that a traditional lender or credit card company wouldn't, but because you get a more direct opportunity to connect and talk with lenders, your personal situation might be more of a factor.
For lenders, you can generate a higher rate of return than with CDs or money market accounts, but clearly there is much more risk. On the other hand, lenders have the ability to perform due diligence via the Internet along with spreading the risk with many other lenders.
Here are few of the more popular sites that have been in this arena for a while:
* VirginMoney.com (http://www.virginmoneyus.com/) Part of the Virgin empire created by Sir Richard Branson, this site can assist you in putting together a "social lending" package to get loans from people you know for real estate, business, personal or student loans.
* LendingClub.com (http://www.lendingclub.com/home.action) One of the largest gathering places for P2P lenders and borrowers with one of the better reputations with the online community. Unsecured personal loans ranging from $1,000 to $25,000.
The cons of P2P lending are definitely more substantial for lenders than it is for borrowers, so if you think you want to give it a try as a lender, be very careful about the hype on the returns and default rates.
Most of the negative comments online from those that have invested via P2P sites was in the "higher than publicized" default rates and the relative return on their money after fees and defaults being less than advertised.
The biggest thing to watch as a borrower is all the potential fine print that could allow the terms of the loan to be changed if you don't make payments.
For those who want to formalize lending arrangements with friends and family (including automatic payments direct from the borrower's bank account) these sites could prove to be very helpful. But as always: do your homework first!
Ken Colburn is president of Data Doctors Computer Services and host of the "Computer Corner" radio show, which can be heard at noon Saturdays on 92.3 KTAR-FM or www.datadoctors.com/radio. Readers may send questions to firstname.lastname@example.org.