It sounds simple, doesn’t it? That’s because it is. Think of it this way:
Peer to peer lending cuts out the middle man and makes the lenders (you, me, the guy next door) money on interest, instead of the banks. Banks traditionally loan money to individuals and businesses, charging an interest rate to make money. You then go and make a deposit to your bank. Maybe it’s your paycheck. You deposit $2,000 into your bank account. The bank then ‘borrows’ your money (and charges you for it through account fees) to lend to other people.
This is an over-simplistic way of putting it, but this is essentially what happens when it comes to traditional lending.
P2P lending, on the other hand, removes the bank. There are platforms that will let you both invest your money in person to person lending opportunities, and borrow from your peers. Prosper (a favorite in the personal finance community) is one such platform, and many people have made a nice profit as investors from it.
It can be a great way to make passive income, and a great way for companies or individuals to get loans (albeit higher interest loans) while bypassing the traditional bank and borrower model.
As to the borrowers, the interest rates are higher than those of traditional banks. Often, though, the banks terms and your ability to get a loan may be impacted by things that wouldn’t necessarily impact your ability to borrow from a peer.
I’ll be discussing different ways of making passive income and perhaps some more untraditional investing methods more often. P2P lending is one that has been getting some attention lately so deserved a mention.