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Between Peers

Could a new wave of social lending sites be a good place for your investment dollars?

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This story appears in the May 2008 issue of Entrepreneur. Subscribe »

Social networking sites embody the current zeitgeist better than anything else in American culture. They're democratic, freewheeling and techcentric--and they've made gobs of for the fortunate few who founded them or invested early. Now, thanks to the growth of peer-to-peer lending, there might be a way for the rest of us to cash in, too.

Whether you call it peer-to-peer or social lending, the trend is in full force. There are several variations, but the basic idea is to cut out the banks as the middlemen for loans. Borrowers--often entrepreneurs looking for a cash infusion--hook up with a lender or a group of lenders and get a loan at less than the prevailing bank rate. Lenders can then diversify their portfolios and receive significantly better interest rates than they would from certificates of deposit or money market funds. The risk is obvious: . But the limited surveys available so far show a lower default rate for peer-to-peer loans than for bank loans. And in some cases, your money can be spread across enough borrowers that any one default wouldn't be catastrophic to the total .

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