Social Media Facilitates P2P Lending

Lending and borrowing underscores economic decision-making in the United States. Whether we're planning our college careers, shopping for cars, buying a home, or starting a business, there's usually a bank involved in the picture. Unless we're lucky enough to have a salary that supports our dreams, we rely on borrowed money to help us move forward and achieve our dreams. As the media reminds us, borrowed money --for some-- has backfired. Failed mortgages and unsustainable student debt loads are two examples of irresponsible borrowing and lending-- and more than one party is to blame. While lenders issued bad loans with deceptive terms, borrowers accepted them without realizing the consequences of their decisions. For others, bank loans have made dreams come true by funding graduate school educations and new businesses. In an economy where debt can be a double edged sword, peer to peer lending enhances competition and openness so people have more control over their lending and borrowing decisions. Making these loans available, widespread, and accessible is social media.

Two P2P lending leaders are Prosper.com and Lendingclub.com. According to ABC, these sites resemble a dating service where lenders and borrowers meet for mutually beneficial relationship. Peer 2 peer lending eliminates middle men so that lenders can earn more money than they would in a CD or savings account, and borrowers can obtain money at more competitive interest rates. In the long term, borrowers end up paying less for their debt, and lenders earn more for their investment.

It is important to understand that there is risk involved with P2P lending. While banks are FDIC-insured, these individuals aren't. At the same time, lenders are able to minimize risk by "diversifying" their investments between different borrowers. As lender Indra Singhal explains, defaults tend to be the nature of this type of industry. In the same article, he illustrates the learning curve associated with this type of market-- identify risks, "read between the lines," and make an educated decision.

And Prosper.com is enabling people to do just that -- make an educated decision. Prosper aims to make their market data "fully transparent," especially for the purposes of academics and research. Currently, market data is available for free download. There is also an open source project that allows members to contribute.

LendingClub has an 80 percent share in the P2P lending market and since 2007, has issued more than $200 million in loans with more than $15 million paid to investors.

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