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Because peer to peer lending is such a new financial innovation, many people are not familiar with the lending process and are interested in learning how this process works.  There are several companies that offer peer to peer lending and the process has been streamlined to make it as simple as possible for borrowers to apply for peer to peer loans and for lenders to find appropriate peer to peer loan applications to finance.  The peer to peer lending process operates in the same way across nearly all peer to peer lending companies.

The first step is for the borrower to create their peer to peer loan profile.  Any person looking for peer to peer loan can create a peer to peer loan profile detailing the amount of peer to peer loan needed and the interest rate that they are willing to pay for the peer to peer loan.  During the process of creating the peer to peer loan profile, the borrower will have to disclose specific financial information that will be provided to the lenders evaluating the peer to peer loan profile for financing.

As soon as the peer to peer loan profile has been created, lenders can begin bidding to finance the peer to peer loan application.  The lender’s bid will include the percentage of the peer to peer loan that that they are willing to finance and the interest rate that they will accept for that financing.  If the peer to peer loan profile is popular and many lenders bid on it, the interest rate for the peer to peer loan will decrease as lenders are willing to accept lower interest rates for their participation.

The peer-to-peer lending process provides lenders with two methods of choosing which peer to peer loan applications to finance.  The first method is manual selection, which allows lenders to browse through individual profiles to find ones that they would be willing to finance.  The second method is automatic selection, which allows lenders to provide a specific set of criteria for acceptable borrowers, such as a minimum interest rate or maximum peer to peer loan amount, and the amount that they would like to lend to borrowers that match these criteria.  Peer to peer loan profiles that match the criteria chosen will be automatically chosen for financing up to the amount specified by the lender.

Once the bidding has been completed, the qualified bids are combined into a single peer to peer loan for the borrower.  The peer to peer loans are repaid monthly with each borrower making a single payment for each peer to peer loan.  Those payments are distributed among the lenders that provided financing for the peer to peer loan.  The payments for each of the peer to peer loans the lender is financing are deposited directly into the account of the lender.

Prosper.com and Lending Club have now each issued more than $150 million in loans to borrowers through their peer-to-peer lending marketplaces, yet many consumers wonder whether or not Prosper.com and Lending Club are a scam are or defrauding consumers in some other way. It’s perfectly natural to be concerned about financially innovative companies, but Lending Club isn’t a scam.

When Lending Club and Prosper first went into business in 2006 and 2007, they were operating without the oversight of the U.S. Securities and Exchange Commission. The SEC stepped in and regulated the peer-to-peer lending industry after accusing Prosper of illegally selling unregistered securities. Both Prosper and Lending Club worked out their legal status with the SEC and have the loans made to borrowers listed with the SEC as registered securities. The two companies have also worked out their legal standing with the majority of the 50 states so that borrowers in all but a few states can get loans through the two companies.

If you’re borrowing from Lending Club or Prosper, it’s just like getting a loan from a bank, but you might get a better interest rate than you would from a bank. You make your payments to Lending Club or Prosper and they distribute your payment to the investors that funded your loan. If you default on your loan, the company will certainly try to collect the debt form you as is their legal rights, but the individual investors have waved their rights to try to collect on the debt, so you don’t have to worry about any individual coming after you.

If you’re considering investing with Prosper or Lending Club, there is some risk involved, but it’s certainly not a scam. Prosper drew criticism from its early investors because of the relatively high default rates that occurred, but the company has since gotten its act together and investors on both Prosper and Lending Club are reporting positive rates of return on their investments. Many investors are making around 9% with their peer-to-peer lending investments and investors that take on more risk are reporting even higher returns. It does take a bit of work to invest with Prosper or Lending Club, but it can be an interesting alternative investment that provides diversification outside of stocks and bonds.

Both Prosper and Lending Club are listed with the San Francisco Better Business Bureau. Lending Club currently has a B+ rating and is a BBB accredited business. Prosper also has a B+ rating. Both companies have had a few complaints during the last few years on the BBB, but it appears that both companies have resolved all open issues.

Prosper and Lending Club are not scams. Both are real companies that offer real loans to real people. They both also provide investors the opportunity to invest in consumer debt with some risk involved.