Social lending, or peer to peer (P2P) loans, can earn lenders nine to twelve percent interest on average. There is risk involved in being a lender but this risk can be diversified by participating in multiple smaller loans. Some claim that these loans are financial arrangements in which both the borrower and lender emerge very satisfied.

By eliminating banks from the lending process, peer to peer lending services match borrowers with lenders and allow both to receive better interest rates. Some services even include small businesses in their borrower clientele. In countries like the U.S. and UK, where small business loans have become increasingly hard to obtain, this is a great alternative.

It is common for borrowers to pay interest rates of between six and eleven percent for these loans. Lenders often earn interest rates of between six and nine percent annually, much better than the returns provided by bank savings accounts. In this auction-style environment, sellers shoot for the highest interest rate, while borrowers try for the lowest.

A unique aspect of this type of arrangement is that lenders can offer their money to borrowers with varying levels of risk. If the individual or business seems like a bit of a credit risk, a higher interest rate may be demanded. The most low-risk businesses and individuals will get the lower rate because the lender has a comfort level regarding repayment.

There is risk that the money could not be repaid, but lenders can minimize this risk by pooling their funds with other lenders in a single loan offered to a borrower. In this manner, a lender could offer $100 to one borrower, $75 to another, and so forth. If one person did not repay, rather than losing all of his or her lent money, the individual would only lose a portion of it.

Keep learning more:

1. P2P Lending: What Is Peer To Peer Lending?


2. How To Make Money Giving P2P Loans


3. Why Paying Off Debt Is An Investment


4. How To Find The Best Saving Account Rates


5. Money Market Rates: Find The Best Money Market Rates


6. Best CD Rates: How To Find The Best CD Rates


7. Inflation is the Biggest Risk of Bond Investing

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