Your bank profits off money sitting in your savings account by lending it out at a higher rate than it returns to you.
So why not eliminate the middleman and lend your money to others yourself?
Though their models vary slightly, these social-lending sites aim to connect borrowers and lenders outside of traditional financial institutions.
The benefit? Both borrowers and lenders can get better rates than they might obtain from a bank, while the Web site makes money off of transaction fees.
Here's how these sites generally work: A borrower posts a request for a loan, providing both the amount and the interest rate he's seeking. Borrowers at LendingClub, for example, typically seek $5,000 to $7,000, most frequently to pay down credit-card debt.
A lender, meanwhile, decides how much money she has to offer and what interest rate she will accept. The site then offers what amounts to an online marketplace, where the lender can view various loan requests and decide which to accept.
A New Asset Class?Once loans are made, the borrowers have the cash to pay down a debt or spring for that wedding. The lender, meanwhile, has a shot at a handsome return. LendingClub, for example, boasts an average return of 12.32% since May, when it launched on Facebook. (Facebook membership is no longer required in order to participate.)
Eric DiBenedetto, a professional angel investor in the San Francisco Bay area, invested "several thousand dollars" with LendingClub on the day of its launch. To date, DiBenedetto has achieved returns of 12% to 14%.
"Originally I did it as an experiment," he says. "But it's become a growing piece of my portfolio. It's a great place to park some of my cash. And in this age of volatility, if I keep getting these returns I may actually move some of the money I have in equities over to these loans."