In today's turbulent markets, it may seem like a dream, but by lending money to others you can return a nice profit on your investment and help others out. The concept is called community lending; the idea is that someone needs a loan and the community helps fund it. The idea is that both sides win as the borrower gets a good rate that a traditional bank cannot give and you help someone that needs assistance, plus you get a good return on your money.
Step 1
A potential borrower will request the dollar amount he is looking for, as well as the reason and description why he believes you should lend to him. The community will then bid on a portion of the loan -- anywhere from $50 up to the full loan request. Typically, many small contributions are made by multiple lenders.
Step 2
There are many sites with the same concept, but Prosper.com seems to be the leader in the field. It "handles" the concept of the community and deals with all aspects of the loan origination. This includes collecting the money and dealing with late payments and collections, if needed. The site will take a small percentage from the lender for this service, which is typically 1 percent.
Step 3
When making a request for money, the borrower will ask for a given percentage rate. When you make a bid on a slice of the loan, you specify the minimum rate you wish to receive. Once the loan gets fully funded, the rate can go down as lenders outbid each other for the rate they are prepared to take. For example, a borrower may ask for $1,000 at 10 percent. If there is a lot of interest and bidding, then the end result may be an interest rate of 7 percent.
Step 4
The more attractive the borrower looks will determine the final interest rate. The loan request duration is one week and so there is typically a lot of out-bidding during the last few hours. The borrower's credit level is the biggest contributor to the rate. A status of AA means a very high credit score, which will dictate a good loan rate, whereas a HR for "high risk" will often see small loan amounts at 35 percent.
Step 5
You have the opportunity to ask the borrower questions during the one-week request period. They can either answer them in private directly to you or post the answer on the listing page for other lenders to see.
Step 6
The length of the loan is three years, so 36 monthly payments are made. This kind of lending may not meet everyone's investment criteria, but check out the site to get more details. There are a lot of other areas covered in the site, like how collections and late payments are handled.
Tip
Don't jump in and start lending without research. Spend a couple weeks reading the site's forums and seeing the approaches that other members are using. There are other sites that track member performance, like lendingstats.com. You can see the portfolio of loans that successful lenders use and learn from there experience.