First up, you might want to take a look at online savings accounts and CDs. Since banks like ING Direct don't have to spend a lot of money on bricks and mortar operations, they can offer higher interest rates than many traditional banks. And even many old school banks offer online accounts with higher interest rates than their traditional offerings.
But thanks to the recent economic downturn, many of these banks are lowering their interest rates. While you could easily open an account with a 5% interest rate a few months ago, you'll be lucky to find one over 3% now. If you're looking for another opportunity, albeit a riskier one, you might want to check out a new breed of financial transactions: social lending services like Prosper, Lending Club, or Zopa.

For borrowers, these micro-lending sites are great because they offer an opportunity to receive a loan without going to a major bank or putting up anything of value for collateral like a house or car. Many people use these services to obtain low interest loans which they use to pay off a high interest credit card. Others invest in equipment or goods for their businesses.
For lenders, the sites offer an opportunity to get a higher return than they can get from more secure investments like CDs. Of course, there's an inherent risk here. If you loan someone a few thousand dollars and they don't pay you back, most of these sites don't offer any sort of protection. But you can minimize this risk by diversifying your loans. Rather than give one borrower $1000, you can give $50 to 20 people. And you can decide who to give your money to after reading about their credit history. If you'd rather be less involved, Proper recently launched a Portfolio Plans feature that lets you set criteria for making loans automatically.
Probably the most intimidating thing about Prosper, Lending Club and other peer to peer lending sites is the fact that they're all so new. Prosper is one of the oldest kids on the block, and it has only been around for 2 years. Since every Prosper loan has a 3 year contract, that means even people who have been using the site since the beginning probably haven't received a full return on their investments yet.

The downside of Zopa is that the service doesn't offer the kind of interest rates that you can find from Prosper or Lending Club. Instead, Zopa investors are asked to open a 1-year CD, with a current rate of 4.25%. That's better than most CDs right now, but nowhere near kind of money you can make with riskier endeavors. Still, if you have a low tolerance for risk and are tired of watching your money accumulate 0.25% interest in your savings account, you might want to check out Zopa.
Do you have any experience with social lending sites? Have you invested or borrowed money? What have the results been? What lending services would you recommend? Let us know in the comments.















Reader Comments (Page 1 of 1)
2-12-2008 @ 6:57PM
kaitou.hack said...
BTW, what's "CD" means here?
Reply
2-12-2008 @ 6:58PM
Brad Linder said...
It stands for "Certificate of Deposit." Basically it's like a savings account except your lock your money in for a certain period of time for a guaranteed interest rate. Terms can range anywhere from 3 months to 10 years.
Reply
2-13-2008 @ 7:40AM
d said...
I've borrowed from Prosper and it was very painless and has gone very well so far. I love how each month it automatically takes out a set amount and then I can add any amount on top of that, any time I want. I could recommend it enough. I've noticed that people with real expectations and real solid reasons to need a loan usually get their loans filled. Most others like "to record my hot new demo" and things like that, normally don't get funded.
Reply
2-13-2008 @ 8:18AM
ezuk said...
These are all US-only, I believe. Is there any international platform like this?
I know of Oxfam, but that's not really what I mean. I want to loan money from Israel to other developed countries, like EU countries or the US.
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2-13-2008 @ 8:23AM
Brad Linder said...
Zopa is based in the UK, Italy, and the US. VirginMoney.com covers the US, UK, Australia, and South Africa. And while there's a site called Globe Funder, it ironically only seems to cover a small portion of the US.
I'm sure there are some others out there though. Anyone else have some thoughts?
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2-13-2008 @ 8:36AM
Dan said...
Just to let you know, the first link to Zopa in your article actually points to lendingclub :(
I'm a Zopa lender here in the UK and I find that the system works for me. Lenders get to choose their own rates, and at the moment I'm actually getting about the same as I would in a savings account (interest rates have changed since I started lending on Zopa a couple of years ago, and a lot of my money is still lent out at lower rates than I'd now like, but hopefully new lendings at higher rates will bump up my overall return).
It's a lot of fun, you can check in every day and watch the money come trickling back in and then get lent out to someone else who needs it.
Cheers
Dan
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2-13-2008 @ 12:20PM
Jonathan said...
A new p2p lending site just opened up in Canada (and by 'just', I mean...yesterday ;) ) http://www.ioucentral.ca/
Another has been in the works for some time now.
http://www.communitylend.com/
Reply
2-24-2008 @ 12:07AM
kyd said...
"So if a borrower doesn't repay a loan, you don't lose any money."
This is a false statement. The FDIC does not compensate you for your "lost investment" - what they do is they offer that 100,000 back up if the company loses your money through fraud or something like it.
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2-24-2008 @ 12:10AM
Brad Linder said...
Right, but in this case, Zopa is offering you a CD with a guaranteed return, unlike the other services mentioned in the article. And since the CD is FDIC insured, your money is pretty safe. You can earn a higher return with some of the other companies, but Zopa is the safest bet for conservative investors.
2-25-2008 @ 11:17AM
Claus said...
For reviews of international p2p lending services look at
http://www.p2p-banking.com
Wiseclerk
Reply