How to Play $1K: Powerful P2P Loans

What You Need to Know

Generally speaking, before you decide to lend at a certain interest rate, online P2P lending involves scouring through listed borrowers, examining their credit standings, why they need the money (whether it's to pay for a wedding, pay for school, start a flower shop, or any number of other reasons) and how much they seek.

Interest is typically received each month and there are generally no fees for lenders, though the sites do differ in some lending/borrowing models. Here's a rundown of the main P2P lending Web portals.

Prosper.com: Lenders search through loan listings and bid for various loan requests by stating how much interest they would be willing to pay the borrower. Think eBay (EBAY Quote). The minimum loan is $50. The site boasts an average return rate of 8% for "prime loans," where borrowers have grade-A credit.

LendingClub.com: This site works more like Match.com (IACI Quote), where the site itself hooks up borrowers and lenders based on certain criteria like how much debt the borrower wants to take on and how much financial risk the lender can stomach. The site refers to itself as a "social lending network" and to that end has even started integrating itself on social networking site Facebook. Lending Club's current average rate performance is around 12%.

Unfortunately, new lenders are on stand-by at LendingClub.com. The site says it's working out "details" with the SEC and isn't accepting individual loans at the moment. Instead, the site is funding borrowers itself.

Zopa.com: One of the newest entrants to the P2P lending market in the U.S, Zopa, first launched in the U.K. in 2005. The global P2P site has a fixed rate of return for investors through its "Zopa CDs." Think traditional bank CDs, with tad higher interest rates than the average 3.0% or so most banks offer these days. For example, a 12-month CD at Wachovia (WB Quote) currently earns you roughly 2.87%. At Washington Mutual (WM Quote) it's 2.81% for a 12-month online CD.

Zopa.com pools together deposits (minimum $500) from various investors to help fund borrowers. At present, investors receive a guaranteed 3.75% rate of return. The fixed 12-month rate has been lowered twice since the U.S. site's December launch, going from 5.1% to 4.5% to the current 3.75% rate.

"We look at the prevailing rates that financial institutions are offering on their CDs...our goal is to have a stronger return," says Chris Strausser, Chief Marketing Officer at Zopa USA.

So how do P2P lending sites beat the traditional banks?

For one, P2P sites are virtual, which means an automatic savings on overhead that traditional brick and mortar banks need to afford. Also, there are no "loan officers," since P2P bank sites offer a direct network for borrowers and investors. Most P2P sites also charge borrowers an upfront fee based on their credit standings. There may also be a processing fee and/or a "delinquency" fee for failing to pay up.