Finances & Money

What is Peer To Peer (P2P) Lending?

I get junk mail almost every day from various financial institutions offering me consolidation loans for my credit card debt, but for some reason this one caught my eye. It was from a peer to peer lending company that I had read other bloggers using to MAKE money. I was a little confused, realizing I didn’t really understand what peer to peer (P2P) lending was. I wanted to educate myself, so I did some investigation.

P2P Lending Introduction

Peer to peer lending is exactly what it sounds like. There are two sides to the process, one group of people putting their money into it (lenders), and another group of people borrowing money from it. It’s essentially financial crowd sourcing, as there is no bank involved. The major p2p lending platforms which are commonly available in the US are prosper.com and lendingclub.com.

Borrowers

People needing a loan can apply for an unsecured loan from a P2P lender. A person might want to do this when conventional banks will not approve a loan for the desired amount, or at all. P2P lenders calculate a potential borrower’s financial risk similar to conventional banks. But borrowers may actually qualify for a lower interest rate with a P2P lender. P2P lenders are essentially another option to investigate for a person in need of a loan.

Lenders

People looking to make money can invest their money into a P2P lending platform. Lenders can specify how much they wish to invest, as well as the amount of risk they want to take on. Lenders look at potential loans, or risk categories, and invest their money according to their comfort level. The higher the risk, the higher the interest rate of the loan. These kind of loans generate higher returns, but the risk the borrower will default on the loan is also higher. A single loan may be funded by one, or multiple investors.

Tax Implications

Because you may generate income or a net loss investing in P2P loans, there are tax implications. Those implications change frequently and are fairly complicated. If you invest in P2P loans, make sure you investigate the current tax laws regarding P2P gains or losses when tax season rolls around.  A good place to start would be Lend Academy’s 2013 tax review for peer to peer and prosper.com.  Click here.

Peer to Peer lending is another option for borrowers to secure financing, but is also another investment vehicle people can use to make money. I’ve actually been thinking about throwing some money into P2P lending try to make some money. How about you, Clever Friends, have you participated in p2p lending as either a borrower or a lender?

Brought to you courtesy of Brock

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Brock Kernin

Brock is a software engineer by day and personal finance blogger at night. He is a fitness junkie and enjoys grilling and smoking meat. Married with two children,  Brock strives to improve his skills as a husband and father, and is always on the lookout to stretch his family’s budget as far as he can.