Have you some money to spare?

As I write this it is nearly 7am and the house is unusually quiet. The baby is fast asleep in the living room, Emma is tucked in her bed and my sister is oblivious to anything around her. Thank you for all your kind well-wishes and prayers; she is doing much better. During delivery she literally lost half her blood (believe me, I was there, so I know this to be true) and her body was never able to recover, hence the need for a blood transfusion.

And the baby is eating us out of house and home. He has gained nearly a pound since birth. The doctor said he is the size of a 1-month old.

But anywho...

If you needed to borrow, say, a $1,000, where would you go? To your bank? A friend or family member? Before banks came onto the scene, people did just that. They borrowed money from friends, family or wealthy money lenders. But beginning in the early 1400's, with the increase of world-wide trade, people discovered that they would need institutions to oversee most money transaction. Thus banks were invented.

Over the past couple of years, however, a new concept has emerged thanks to the internet. Much like peer-to-peer file sharing (think music and movies), two new online companies have created the first modern peer-to-peer lending system. In February 2006 a company called Prosper opened America's first people-to-people lending marketplace. A British company called Zopa made its way across the Atlantic shortly thereafter.

But both work the same way. Borrowers create an online profile stating how much money they need to borrow and why. And it literally can be for anything....a little help to pay off high-interest credit cards, a college student in need of money for books, someone needing a little money to help open their own business. People interested in lending the money then look through the profiles and bid on different loans with the amount they are willing to lend and the interest rate they want to make. The bidders with the lowest interest rates win, their money is combined and deposited into a regular bank account for the borrower. They money is then repaid through an automatic system until the loan is paid off.

The process is actually more complicated than this, but for the sake of this blog I don't want to get into all the nitty-gritty. You're welcome.

They key for lenders is to "diversify" their lending. Instead of investing $1,000 into one loan, the idea is to spread $100 out over 10 different loans. That way, if one loan defaults, they haven't lost as much.

It is a concept that really pays off for each person involved. The borrower gets to borrow the amount they need at a lower interest rate than they would most likely get at a traditional bank (especially if they are high-risk) and the lender gets a higher return on their "investment" than they would typically get from a traditional savings account. It is also a lot less risky than investing it in Wall Street.

Now usually I make it a point to never loan out money I expect to get back, but this idea really interests me. It's not something you could get rich off of, but it does provide the chance to make a little money on the side. All while offering a little bit of financial help to someone that needs it.

What about you? Would you invest money into something like this? Would you borrow money this way?