Understand Peer Lending Sites
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Peer-to-Peer Lending: The Good and the Bad

In today's slowing economy, many Americans are caught between rising food and fuel prices and plummeting home values. And, since the credit industry is struggling as well, loans are harder than ever to come by.

In fact, unless you've got a stellar credit history, you may not be able to borrow money from traditional sources like banks or credit unions.

Thanks to the networking power offered by the Internet, borrowers without sturdy credit histories who are in need of money have an option they didn't just a few years ago.

How to Borrow (or Lend) for a Bargain

Peer-to-peer lending allows regular people to borrow money from other regular people - sometimes at lower interest rates than are available from banks or credit unions.

Several Web sites offering peer loans have sprung up in the last few years.

Here's how they work:

  • Borrowers and lenders join. To join most lending sites, network administrators require a credit and background check for both borrowers and lenders.
  • Borrowers post their needs. Once you've been approved, you indicate how much money you need to borrow and the maximum interest rate you're willing to pay.
  • Lenders bid for borrowers. Like an eBay auction, lenders then offer to loan some portion of the total amount, at whatever interest rate they think appropriate.
  • Borrowers choose lenders. Once borrowers have received offers, they choose whichever combination of lenders best fits their needs.
  • The site takes care of paperwork. To ensure that loans are repaid, Web site administrators draw up terms of borrowing so that lenders and borrowers are legally bound to the terms they agreed to.

Benefits of Peer-to-Peer Lending

Peer-to-peer lending sites can be an excellent venue for loans between family members and friends - in fact, some sites are specifically designed for loans between people who already know each other.

Lending through the established forum of a Web site helps eliminate any awkwardness or relationship strain that can otherwise result when loans are made between friends.

And even those who have never met the person from whom they're borrowing (or two whom they're lending) have noted that loans between individuals come with a heightened level of responsibility.

Many people, it seems, find defaulting on a loan from a faceless institution much easier than defaulting on a loan from an individual person. Plus, for investors, lending to peers can offer higher returns than savings accounts or the stock market.

The Downside of Peer Loans

Like anything else, though, peer lending has its negatives. Critics have cited the following as some of the biggest drawbacks of peer-to-peer loans.

  • Most loans aren't insured by the Federal Deposit Insurance Corporation, meaning that if borrowers don't repay, lenders have little choice but to turn to a collection agency. Bank and credit union loans typically carry FDIC insurance.
  • Not all networks are certified to regulate transactions in all states. Depending on where you live, you may have limited access to such tools.
  • Since background checks are mandatory for site users, some people worry that sensitive information could be leaked and identity theft could result.
  • If used improperly, such loans could serve as yet another chance for struggling borrowers to land themselves in debt they can't afford.

The above summary of peer-to-peer lending is by no means all-inclusive and is not legal advice. For the latest information on peer-to-peer lending, speak to a bankruptcy attorney in your area.

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