Peer to Peer Lending (P2P) Tips

Posted On: May 14, 2009

An excerpt from The Complete Idiot’s Guide to Person to Person Lending.

Peer to peer lending (P2P), also called social lending, lending and borrowing is a new twist on an old way to lend and borrow money.

You probably already have a couple options for how to borrow money. You can run up balances (if you do carry a balance, be sure to shop CardRatings.com for the lowest rate cards) or get a cash advance on your credit cards (which is a bad idea given the high rates associated with cash advances). You can go to a bank and try to get a loan. If you have a house, maybe you have considered getting a second mortgage on it. Or maybe you can go to a friend or a relative to borrow money.

P2P lending is on the rise because it addresses some pressing issues with the current, traditional system of lending and borrowing through banks and financial institutions. It can be difficult, if not impossible, for certain individuals and businesses to get loans from banks or other financial institutions because the current economy has hit a lot of people hard.

Have you had one of your credit card limits reduced recently? Due to the economy, some consumers have experienced reductions in their limits on bank issued credit cards. This has even happened to consumers with excellent credit, by the way. Sometimes there’s no warning. If you depend a lot on your credit cards to get by, be aware that your limit can be reduced.

In the Red

Even in good times, banks are typically very conservative in their lending standards, and tend to make only those loans that are secured with tangible assets (known as collateral). For example, a bank will lend you money for your home because your home is the collateral against that loan. If you do not pay the bank back, they will sell your house and use the proceeds to pay off the loan. But unless you and your loan fit into one of the acceptable categories (for example, you have excellent credit or tangible assets) at your bank, you can find it hard to borrow money from a bank.

If you own a business, a bank will lend you money against your assets (whatever land, buildings, computers, and equipment the business owns) or in some cases against your receivables (the money you have not collected yet from the customers to whom you sold your products or services). But if you are a small business that does not have those kinds of assets, you can find that getting a business loan from a bank is very difficult, if not impossible.

If you go to borrow as a business or an individual, you may find that the interest rate that the bank wants to charge you (which depends upon the bank’s assessment of how risky your loan is) may be much higher than what you are willing to accept. And if you are a saver, you may find that the interest rate that the bank is willing to pay you on a savings account or a CD is not very interesting” at all to you.

P2P lending and borrowing is a new way for you to borrow money, or if you have extra cash, a new way for you to lend money and earn interest. So if you’re feeling a little squeezed in today’s economy, you might be thinking about getting a P2P loan. Or if you’re someone who has a little extra cash, maybe you’re considering becoming a P2P lender. You may really like the idea of helping someone while possibly still getting a good return on your investment.

Whether you have heard about P2P lending before or this is a brand-new concept to you, The Complete Idiot’s Guide to Person to Person Lending will teach you everything you need to know about this fascinating topic.

What are your thoughts on P2P lending? We welcome you to share your ideas on our active credit card forum.

This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.

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