P2P Lending: How Private Individual Loans Work

Person to Person Loans

Also known on the internet as peer 2 peer lending, person to person loan websites are gaining in popularity, not just with those wanting a loan without the hassles of a bank, but for individual and small investors as well. Through a person to person loan website, anyone can register as a lender or borrower. The website works as a facilitator, connecting people who need money with people wanting to invest their money.

How Person to Person Loans Work

Once a borrower registers with the website, he inputs his request for how much money he wants to borrow, length of the loan, and states what the money will be used for, such as to consolidate debt or buy a new car. The website evaluates the loan amount and borrower's credit report to determine the interest rate for the loan. The loan request is then made public, although the borrower's credit profile is only available to registered lenders.

As a lender, you can browse the many loan requests and choose whom you would like to invest your money with or opt for an automated plan. The automated plan chooses loans for you based on your risk and lending amount preferences. You have the flexibility to lend less than one hundred dollars to any one person and diversify your lending portfolio. Typically, multiple lenders finance each individual loan to minimize the risk of a default.

Payments are managed by the website. The borrowers agree to make monthly payments by a specified day to the p2p lending website. Often these payments must be made with an automatic withdrawal from a bank account. Lenders are then paid their share of the investment by the website.

Choosing a Person to Person Loans Website

A quick internet search will give you dozens of websites that bring individual borrowers together with individuals making private loans. However, you don't want to jump on board as a lender or borrower with the first company you see. You want to work with a reputable company that has a history of getting loans fulfilled and paid back in full.

Two quick checks will help you determine the reputation of a person to person lending company. First check with the company's registration with the U.S. Securities and Exchange Commission. Reputable companies will be registered with the SEC. Next, review the website's profile with the Better Business Bureau. This will show you any complaints against the company and how those complaints were handled by the company.

Other things to consider when choosing a social lending website are the fees associated with the service, how late payments or loan defaults are handled, and the site's statistics. Fees will vary by website. Often both the lender and borrower will be subjected to fees related to the loan. As for late payments and defaults, as an investor you want to choose a company that will handle collections for their investors. Most sites will have a page detailing the company's statistics such as average loan amount and interest rates and how many of those loans are currently past due.

Tips for Asking for a Private Loan

How you ask for a private loan through a person to person loans website can make a big difference in getting your loan funded by private investors, especially if you have a poor credit history. When requesting a person to person loan, you should give the best presentation possible. This will help show that you are responsible and financially secure enough to handle the payments and a budget, despite any past financial troubles.

Do give details about the purpose of the loan such as to pay off credit card debt or purchase a vehicle. Don't ramble, a simple sentence or two will suffice.

Do explain any past financial troubles. If a job loss or medical bills are the reason for a lowered credit score this can help lenders understand your situation. Explain how you have improved your finances such as getting a new job that will allow you to afford the loan.

Do give a budget to show that you can afford the monthly payments. You will have fields to fill in showing your monthly income and major monthly expenses such as rent and food. Showing that you have the money to cover the loan payment will give investors confidence in lending you money. Don't show your poor math skills. Use a calculator and make sure you really can afford the payments.

Do use a word processor with spelling and grammar check to write your private loan request. Have someone proofread your request if you need to before copy and pasting onto the website. Don't use texting language or poorly constructed sentences. You may see using good writing skills as trivial, but lenders may see poorly written requests as a sign you are young or have a limited education. This may give the lender the impression that your potential income and ability to pay back the loan are also limited.

Lenders have the option to ask you questions. Respond to those questions quickly and professionally. Again, don't answer lender questions as if you are texting your best friend. Instead, answer as if you are responding to an employer.

Tips for Becoming a Private Lender

With interest rates exceeding 35% and the option to start small with less than $100, investing in person to person loans is certainly worth investigating as an investment opportunity. However, lending money to private individuals that are avoiding a standard bank loan also certainly comes with some risks. You can lose all of the money you lend if the person defaults on the loan. Selective and careful lending will help you minimize these risks.

If you are investing by selecting one lender at a time, read that borrower's profile carefully. By viewing the person's credit rating, financial plan to pay back the loan, and reason for the request you can get a feel for the person's ability to meet his or her loan obligations. Feel free to ask more questions of the borrower if a red flag stands out in the profile, or just move on to the next loan request.

Just as you would with any other investment portfolio, don't' invest all of your money in one person. Instead, spread out your money and lend to several individuals. This spreads out your risk.

Also, understand the risk of person to person loans. Higher interest rates usually mean the loan comes with more risk that the person may default. If you choose to invest in these higher risk loans for the potential to earn more money, balance your lending portfolio out by also investing in loans that come with a lower interest rate and thus a lower risk of losing your money.