Finding out about the newest lending channel

A Primer on P2P Lending

by Tushar Mathur

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Safe Long Term Investing

It's no secret that peer-to-peer (P2P) lending is one of the hottest movements in online investing today. However, many people are afraid to jump in because they believe that it's, well, a scam. People are fearful of new things, especially when it comes to their money.

However, P2P lending is very real, and thousands of investors all over the world have made some spectacular money from funding loans for online borrowers. For those that are sold on the movement, but don't know where to start, this is for you. What follows is a primer on P2P; it's what you need to know to get started.

Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, social lending and P2P lending) is the practice of lending money to previously unrelated individuals or "peers" without any intervention from traditional financial institutions like banks.

Choose a Platform and Register

Over the past few years, P2P lending websites have cropped up all over the internet. Some are reputable, but others aren't. I'd recommend sticking with one of the biggest two platforms in the biz, which are or

Here's some background on Prosper to make you rest easy. The company's CEO is also the vice chairman of The Charles Schwab Corporation. Prosper was the flagship peer-to-peer lending marketplace in the United States, and the company boasts close to 1.5 million members and more than $400,000,000 in funded loans to date.

Lending Club is as legit as it gets, too. Harvard Business Review recognized the company as one of the 20 "Breakthrough Ideas for 2009," and it's racked up many other honors from big names in the finance world as well. Lending Club investors have funded $902,569,500 loans to date, with $60,067,825 funded in the last month alone.

Pick one of the two big guys to start and simply sign up for a free account as an investor. It only takes five minutes, and once you've signed up, you're ready to get started.

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Link Up Your Accounts

After you officially have an account on one of the big two P2P websites (or both!), you're ready to get started. Standard protocol is the same as PayPal if you're a user of the service. You simply link your bank account to your P2P account.

After that, you need to wait a few days and monitor your bank account for a couple of small deposits from your lending platform of choice. Once you see them in your account, simply enter the amounts in your P2P account to verify. Then, you're ready to transfer money between your bank account and P2P account, respectively.

Decide on a Strategy

Once you have funded your P2P investing account, it's time to spend some serious time sifting through loans to fund. The single best way to do this is to make use of the filters when you search. Fund each loan that fits your criteria for only a small amount, such as $25. This way, you'll minimize the risk you'll face if one of your borrowers (inevitably) defaults.

Another thing to keep in mind when selecting loans is to spread your choices over a variety of credit grades. Higher credit grades are safer, but the interest rates you'll earn are lower as well. Lower grades offer a higher interest rate, but the risk of default rises alongside the increased returns. As with anything in life, moderation is the key to successful online lending.

Tushar Mathur writes at Everything Finance. Everything Finance is a site about just that, everything related to finance. You can get information about investing, saving money, shopping, blogging, and making money online. If you like what you see here, make sure to follow @AllFinance on Twitter.

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