As someone who has lent out over $12,000 over the past 1.5 years (but is now completely divested again, see note below) here is what I prefer to see in a loan request before I bid.

  1. Be accountable! The original idea with peer to peer lending was that a group of people (like a knitting club) would get together and hold each other accountable. Needless to say, lenders have realized that this haven’t worked at all. (If you know any groups that indeed functions like that I’d love to hear about them). Offer some accountability. Start a blog detailing how you intend to use the money. Have a friend or a colleague (not your mom) put down a large sum (not $100 but $500 or more) as a sign of good faith and that somebody trusts you. Try to find a group leader that will verify your W-2. Realize that lenders have little collateral other than your social capital. Give them that and you will be ahead of the other borrowers.
  2. Check grammar and spelling. This should really be a no brainer. If you can’t spell, get someone to do it for you. When I see a loan request from someone who can’t be bothered to check “there” spelling I wonder whether they can’t be bothered to check the math in their budget either.
  3. Be careful who you ally yourself with. For instance, not all “good and honest” Christians, firemen, or soldiers actually pay back their loans. Being a lender can create lots of (unintentional) prejudices based on single experiences with borrowers breaking their promises. Of course this can work the other way as well. The lesson to be learned is that if you do associate yourself with a group do not presume that everybody thinks as highly of that group as you do.
  4. Ask for less than you need. If you are $10,000 in debt, don’t ask for $10,000. I realize that it would be nice to consolidate all the debt and I also realize that borrowers might put themselves in a bind since it is only possible to carry one loan at a time. However, don’t ask for anything you’re not sure you can’t pay back. In other words, don’t be an optimist. The reason is that the lender certainly isn’t. Also it is a lot easier to get a small loan funded. Lenders are primarily interested in what you can do for them (not default, not be delinquent, pay a high rate in that order). Not what they can do for you. Keep that in mind!
  5. Show a business plan. A budget is not a business plan! Clearly you are asking for money because present/other methods have somehow failed to obtain the cash. Therefore I would like to know what has been done already? Have you taken on an extra job? Cut cable? Moved to somewhere cheaper? Show me that you have thought about this and that the loan request is not just an easy way to increase your cash flow.

Note: I am now completely divested from P2P lending. While some apparently are doing great, I think the most money in P2P lending is done by earning affiliate commissions. Keep in mind that it’s hard to tell if you only have a handful of loans. You could be the lucky one with zero default. Conversely of just one of your five loans go down, you lost 20% and are probably in the negative. I had a highly statistical portfolio with a couple of hundred loans. I managed to escape this adventure with a loss of only $268 in total. In a way I did better than if I had invested it all in the S&P500 and pulled it out again, but it doesn’t seem to be a safe way to earn a yield for retirement. In the future, I will stay far away from unsecured debt. For lending, I prefer bond ETFs. Bonds is an asset group where I actually recommend indexing due to the less liquid market.

Originally posted 2008-02-07 06:39:46.