Borrowing and lending money from one individual to another can be a very risky proposition. Most of these loans are made to/from friends and family, and relationships can be forever scarred by the mishandling of said transactions. Community lending sites are the perfect solution; they allow for the security of bank-like practices, while still retaining a personal touch.
For my example, I will use Prosper.com, a site I have worked with for some years now. When you create a profile there, you can sign up as a borrower or a lender. As a borrower, you create a financial profile (similar to setting up an online bank account, you will need a decent amount of personal information at hand to do this), and Prosper will assign you a credit rating (similar to a credit score, usually done with letters such as AA <really good> or HR <high risk>).
Once you have your rating and profile set up, you are ready to create a listing. There are many listings you can use for ideas, basically you want to describe the personal reasons for taking the loan (such as listing any hardships you may have had, losing your job, illness, family troubles, etc.), and then follow with how you intend to pay the money back. There are areas to list your income, assets, and existing debt in the listing so the lenders can evaluate the risk of offering you money, rather than just going by the credit rating alone.
That’s not all you need to create the listing. You also need to determine how much you want to borrow, and what interest rate you’re willing to pay. The terms of Prosper loans are typically 3 years, principal and interest, so you can figure out what your payments will be. Prosper even helps by showing you tables listing the interest rates people with similar credit ratings to yours have paid within the past 30 days, so you’re not just pulling numbers out of the air. But the best part is yet to come.
Depending on how popular your listing is, your interest rate may go down before the loan closes. Let’s say you set a maximum rate of 10%, and your listing is set to run for 7 days. If your loan is fully funded on the 5th day, more people may still want to lend you money. The lenders determine the minimum interest rate they are willing to get for their money. Let’s say a new lender sees your listing on the 6th day and is willing to lend you money at 9%. He will knock out any other lenders that were only willing to lend at 10%, and in this manner your interest rate could drop 1, 2, or even more points before the loan is ready to close. This is why it’s best to let your listings run as long as possible (usually 7 days is the max).
The paragraph above starts to explain the lender’s role. As a lender, you get to determine what rates you want for your money, and you can sort through the listings to pick the ones that appeal to you, for personal or financial reasons. Prosper also has automatic bidding, that allows you to set parameters for how your money will be offered so you don’t have to look through the listings yourself. Remember some loans do default, so you need to factor that into your return on investment. Prosper shows the percentages of those who default for the different credit ratings and other variables.
In summary, sites like this (there are others, Prosper is simply the one I have experience with) can be a great benefit to those who want to create their own loans, by adding a personal touch while still maintaining safety and risk evaluation as a bank would. I have recommended this to clients in the past as a way to consolidate debt, and it has been successful. I have also lent money through the site myself, and while there are points to recommend it to lenders, I would generally say that you should do it for the personal reasons rather than the financial ones (hard to get rich this way). One caveat: Use Debt Wisely.
