How To Use Social Lending

If you are having trouble obtaining a loan from your local bank, social lending could provide an alternative way to obtain the funds you seek.The basic concept of social lending (also called peer-to-peer lending) is that when you need money, others will pool their funds together and lend them to you. With many of the social lending services you can also participate as a lender and help fulfill loans that are requested.

There are two companies that dominate the social lending industry: Prosper and Lending Club.

To use Prosper as a borrower, you setup a request with the amount you are looking to borrow -- from $1,000 to $25,000. Next you set the maximum interest rate you are willing to pay and create your "story". The story provides lenders with the reason you need the funds and how you will use the money. Prosper lenders begin a 7-day auction where they may bid down the interest rate. Once the loan process is completed, the funds are deposited into your account.

Earlier this year Prosper announced the following company stats since inception:

Lending Club works in a similar fashion to Prosper but with a few differences. Loans are limited to 3- or 5-year terms with fixed interest rates and equal payments. The interest rates are set on a loan based on the credit rating of the borrower.

Lenders can select to invest in multiple loans to diversify their portfolio and manage their risk.

Back in March, Lending Club Sr. Director, Product Strategy Rob Garcia posted an update on the company's progress. Rob noted the following Lending Club stats:

Lending Club provides a near real-time stats page that shows figures including: loans funded, total dollars funded, use for funds and investor return rates.

The concept of asking strangers for a loan rather than a bank is new for most people. As more of us become aware of this new financing alternative, the industry will continue to grow -- both for borrowers and for lenders.

As with all financial programs, make sure you do your homework and read all of the rules and terms on the company's website.