The Secrets of P2P Borrowing

NEW YORK (MainStreet) — Banks have grown more cautious about making loans to individuals for debt consolidation, small business development, home remodeling and other big-ticket expenses like car purchases and wedding bills. As a result, prospective borrowers who are less-than-model financial citizens often find themselves struggling to get such cash.

Piling on more credit card debt or hitting a money store should never be the preferred alternative, and thankfully these are no longer the only ways a credit-challenged borrower can go. A relatively new SEC-regulated online loan system known as Peer-to-Peer or P2P lending has recently gained a lot of steam and attention. And most experts agree it's become a legitimate option for many of those who, for one reason or another, are just not attractive loan customers for traditional banks.

"It fills a really big need, which has grown since the recession as traditional financial institutions have been increasingly reluctant to make these kinds of loans," says Kimberly Foss, founder of Empyrion Wealth Management and author of the new book Wealthy by Design (Greenleaf, 2013). Foss says this is a huge development for borrowers so much so, that she's become a lender with one of the industry leaders.

Building on a concept pioneered about a dozen years ago to bring individual borrowers and lenders directly together online, it is now being used for business loans, mortgages, student loans and short-term notes for a variety of purposes. Those who want to borrow are matched with those who want to lend; P2P companies serve as underwriters and facilitate the loan and repayment. Even with the fees they take off the top, borrowers obtain loans at less than credit card rates while lenders regularly receive better returns than they could realize otherwise.