More Americans are bypassing banks and turning to Peer-to-Peer lending groups on the Internet. Such loans now total over $3 billion and are expected to double by next year.

With the credit crunch making it tough to get a loan and the recession hammering interest rates for investors, "peer-to-peer lending," or "P2P," is becoming increasingly popular.

P2P websites like Prosper and Lending Club link lenders lured by high interest rates with borrowers who need money for everything from home repairs to college tuition to debt consolidation.

P2P lending sites were forced to close briefly in 2008 when a new rule required them to
register with the Securities and Exchange Commission. But most are back in business now and thriving. There were $647 million in P2P loans in 2007. That's grown to $3 billion and is expected to nearly double to $5.8 billion next year, according to Celent, a consulting firm that tracks P2Ps.

Recent problems in the financial system have contributed to that growth. Despite the bailout
funds big banks have received and the profits they've recorded, "the money's not getting into the street," says Chris Larsen, CEO of Prosper. As a result, people who need loans are looking for alternatives. Adds Larsen: "I think Americans are going to have to start participating more
directly in the credit system," by making loans to one another through P2P sites instead of relying on banks.

The average investor at Prosper makes $3500 in loans and earns 9.38% interest. But with
greater profit comes greater risk. While the site has taken steps to make loans safer for investors--including raising the minimum credit score required to borrow--some loans will default.

Experts urge potential investors to approach P2P with caution, diversifying their portfolios into
many small loans to minimize default risk.

While P2P lending is growing quickly, the service "still is proving itself," says Mark Schwanhausser, an analyst at Javelin Strategy and Research. Right now, he adds, more people are interested in borrowing with P2P than investing.

Source: Parade.com, November 08, 2009