Must-Read: Investigating person-to-person lending

Salon.com (subscription or ad-viewing required) has a great article online today about the growing person-to-person lending industry. Sites like Prosper.com work as a virtual eBay of lending, connecting borrowers and investors to finance three year loans. Promising reasonable rates and good returns for investors, person-to-person lending is becoming a viable alternative to traditional personal loans.

This article addresses the benefits and risks of person-to-person lending operations. While the concept seems simple, there are equal opportunity lending laws and long term success rates that have yet to be considered. And there is also the simple fact that most traditional lenders and creditor understand risk extremely well. Credit scores aren't perfect but they are a very accurate way to predict whether someone will default. Would you be willing to bet on someone that traditional banks have passed by? Here's one example mentioned in the article:

If I told you about Person X, who had a credit rating of H.R. -- "high risk," the lowest rating -- a string of recent delinquencies, and a 20 percent debt-to-income ratio, you'd probably conclude that she was heading straight to bankruptcy. Lending this person money would be about as profitable as throwing it into a fountain and waiting for your wish to come true. But what if I also told you that this person, Suzy, had accumulated her debt while she was studying at Harvard Law School? And what if I mentioned that she had just graduated with honors, and had accepted a job at a Manhattan firm with a starting salary of $140,000 a year? She only needs a loan to tide her over until she starts work. Now I tell you that she's willing to pay a 20 percent interest rate on your money. Would you take a risk on her now?

Read the article online and let us know what you think. Would you borrow through a person-to-person lender? Would you lend your own money through this kind of service? What do you think will happen to sites like Prosper.com in a few years? Share your feedback in the comments section below.