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The Secrets of P2P Borrowing

Relatively new process has grown fast

The first dedicated P2P to focus on the U.S. loan market was Prosper, which launched in 2005. Lending Club opened for business in 2007 and is now by far the larger of the two, which combined last year to issue nearly $900 million in loans for a wide array of purposes. Other firms concentrate on specific niches, such as National Family Mortgage, which facilitates home loans between family and friends, and Common Bond, which specializes in student loans.

All Prosper and Lending Club operations have been overseen by the Securities and Exchange Commission since 2009, and the industry gained even more credibility in recent months as Google invested $125 million in Lending Club and Prosper picked up additional venture funding.

Most customers of the two P2P companies want to consolidate debt from revolving credit lines and are looking for $10,000-$25,000 at a lower rate. The majority of these loans are for three years, although many are for five and some can be for even longer. Rates depend on credit scores, but can be as low 10% to 12% versus 15% at a bank — if the borrower could get such a loan in the first place.

Both companies say new loan requests are snapped up by lenders within hours of being approved and posted on their sites. Simon Cunningham, editor of a comprehensive industry-monitoring site called LendingMemo.com, says loans can land in a borrower's bank account as soon as three days after they apply. "The rates are lower, it's all done online and it's quick," he says of the growing appeal.

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