Peer-To-Peer Lending...It's Back and will be the next big thing!

The SEC recently approved Prosper.com's application and they are returning to the lending arena. For those of you unfamiliar with Peer to Peer lending, sites like Prosper.com, LendingClub.com, Zopa.com as well as others are places where borrowers can get loans of up to $25,000 at various interest rates.

How it works is a borrower requests an amount and sets an interest rate he is willing to pay and much like eBay multiple lenders come together to bid on the same loan and input a hidden interest rate they are willing to settle for. Once the loan is fully funded, the more lenders who continue to bid, drive down the interest rate until the close of the "auction". Terms for repayment are always 3 years but at least you know there is light at the end of the tunnel unlike Credit Cards.

I've been a member of Prosper for more than a year and was disappointed when they went dark at the height of the financial crisis due to the SEC filing. Right now they are only permitted in limited states as each state must sign off on their agreement with the Feds. While you can borrow, you cannot bid in states that have not yet signed the agreement.

Why is P2P a good thing? Well for one, P2P will jump-start lending and put more pressure on banks to begin to loosen credit. While the maximum amount isn't huge, it will be enough for many small business owners and individuals to get loans they do not qualify for through the traditional lending system. One caveat that I do not like since Prosper has been back online is the minium credit score threshold of 640. I believe this is set too high, particularly for the people who need it most, those who are emerging from BK's and foreclosures. I still contend that in the new economy a credit score of 640 will be the average as credit card companies continue to squeeze consumers by canceling credit cards, lowering credit limits and increasing % rates. This effect will increase peoples DTI (Debt to Income Ratio) giving a false impression that you may not be able to handle the situation. I believe this will be the new frontier for lending and probably have a positive effect on creating new standards by which credit is used and re-paid.
My Prosper portfolio has been quite successful and when they become fully operational, they will offer a secondary market for "selling" your notes (Just as Wall Street did!). This secondary market will be much like the derivatives in which you will be able to sell both good quality notes and bad notes to others. While I don't really plan to sell, it is designed to free up capital so you can continue to invest and reduce your risk.

I believe P2P will at some point out maneuver the banking industry and grow exponentially faster. After all it is people lending to people at a rate set by the marketplace. If you already haven't done so, I recommend you visit the sites and become a lender if you are permitted at this time. While I can only speak to my own results where I've received an 11% return on my money (with no bad loans!).

I believe helping individuals in need will make us all better and allow us to get out of this recession quicker.

Note: I am not affiliated in any way with any of the companies listed above, nor do I have any vested interest in whether you choose to join.