Thursday, June 6, 2013

Alternative Borrowing and Investing through Peer to Peer Lending

In today's market many banks are holding back money and the loans they do give out are limited. Even people with good credit find that they have to pay high interest rates, that is if they can get the loan.

Since the start of the recession and housing crisis peer to peer lending, also known as P2P, has grown in popularity. It had gained so much attention, that even the tech giant Google is pairing up with Lending Club, a leading peer to peer lending site.

Now, by no means is P2P considered easy money since there are requirements that need verifying including proof of income.

Lending Club requires a minimum 660 credit score, a credit history over 36 months, a debt to income ratio less than 35%, and a valid bank account.

Prosper, another P2P site, requires the borrower to be a US citizen with a valid social security number, an utility bill in your name, and an active bank account and a credit score of at least 640.

Both sites require the borrower to make an ad on their site for lenders to see. If you are wondering what kind of loans are getting funded, Prosper allows a look at their listings on the 'Invest' tab or click here.

Part of the popularity is that they offer lower interest rates that traditional banks making it a great place to consolidate high interest credit cards.

Now, like anything else think twice before getting any loan. Just because you can, doesn't mean you should. The down side to these loans are that they require automatic payments from a bank account. Even after funds are promised by potential investors the loan could still be denied if paper work cannot be verified or you are deemed to high of a risk by underwriters.

On the flip side this is also a new way to invest money that just about any one can join in. One thing I would like to make clear first is that there is some risk of losing money or not making as much as you would have hoped due to defaulting loans. There are ways to guard yourself from large losses by using common sense.

One big issue that I have seen from investors is that they did not make the money that is advertised on the site. After reading a little further you can see where they went wrong. First, do not put all your eggs in one basket. There is a reason why there is low minimum you can invest in single loan ($25). That is so you can diversify your money to different loans in case one defaults and fails to pay up. So spread your money around.

Now handing over money to loans with higher interest rates can potentially earn you a larger return; but that also means you are willing to take a higher risk. Do not invest everything on high interest loans. This is why both sites have a grading system; it's so that a potential lender can evaluate risks. While investing in these high risk loans can potentially make you more money, its safer to spread your money around and invest in safer lower interest rate loans in case of default.

If you are interested in investing to peer to peer lending than start off slow, read all the tips and  recommendations on the site.

Since we are on the topic of peer to peer lending there is also a company called Housing Angels. If you have a lot money lying around and want to not only invest but help someone out than check them out. They help homeowners facing foreclosure by finding investors to buy their houses in short sale and rent the house back to them with an option to buy it back. Since the beginning of this program, people who have had their houses saved have started repurchasing their homes back.

They focus their efforts to the Las Vegas and Phoenix area. So if you are looking to save your home or invest in real estate look into Housing Angels before the tax break for foreclosed homes expires at the end of 2013.

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