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Peer to Peer Lending Becoming More Popular

I was listening to NPR’s Morning Edition the other day when they started talking about peer-to-peer lending companies [3] like Lending Club [4] and Prosper [5] (currently closed pending SEC approval).

I’ve written about peer to peer lending [6] a few times before, first when Prosper’s Peer to Peer Lending Marketing [7] debuted and then once again when LendingClub offered their peer to peer lending service [8].

I personally don’t invest using either service because I didn’t have confidence in an untested system in a totally new paradigm. However, if I were a borrower, I’d jump at the chance to borrow money from individuals rather than the monolithic lending industry. You’d be kidding yourself if you didn’t think the lending industry, be it loans or credit cards, doesn’t jump at the chance to lock you in to something complicated and counterintuitive (option ARMs anyone?).

The borrowers probably benefit the most in this arrangement. The experiences profiled in the Morning Edition clip echo many that I’ve read online – borrowers get the opportunity to get loans with better terms and with less headache. While you are still ranked by your score, you get to add a little color commentary not captured in credit histories.

For investors, I have read that default rates were higher than they first listed and individuals are finally learning why the lending industry acts the way it does. A lot of people default. The benefit of peer to peer lending is that investors can invest small amounts into many loans, thus diversifying their risk. I like the idea of having another avenue to invest in outside the typical stock/bond/whatever paradigm but I’m still apprehensive.

While I’m still not sold on the idea of investing in peer to peer marketplaces, if I needed a loan I wouldn’t hesitate to put them on my list of places to get a quote from. What are your thoughts on the peer to peer lending industry?