NEW YORK (MainStreet) The "Aha!" moment came for Simon Cunningham in 2011, not long after he landed his first real job and was looking for a way to start socking money away for retirement. Proficient in technology, literate in financial matters and committed to social responsibility, Cunningham was hooked the moment he came across an article about a new way to loan money called peer-to-peer lending.
The article described a quickly emerging industry that used online platforms to match individual borrowers with private lenders. People with less than stellar credit were able to obtain loans, usually at lower than standard rates. Those with money to invest were able to help people in need and realize returns often higher than they could get elsewhere.
It was a win-win, says Cunningham, who began investing almost immediately through the two primary P2P lending sites and now edits a blog called LendingMemo.com that advocates for the practice and helps others navigate its intricacies.
In the two years since he became involved, P2P lending has exploded. The largest player, Lending Club, crossed $1 billion in issued loans last November after five years in operation and hit $2 billion just eight months later. Shortly after, it attracted a $125 million investment from Google. Its rival, Prosper, has issued only about one-third as much but reports volume growth of 10% monthly. It also just picked up new venture funding and boasts of a board that includes former U.S. Treasury Secretary Lawrence Summers.
What's this mean to investors? "I've been one for more than a year," says Kimberly Foss, founder of Empyrion Wealth Management and author of the new book Wealthy by Design (Greenleaf, 2013). "This is the epitome of the free market. I'm a big fan."