People quote the old saying: "There is nothing new under the sun", and this may be applied to peer to peer personal loans. In ancient times, before banks were around, money was lent from one individual to another. If someone needed money to build something or expand a business, he would approach someone who he knew had some money to spare. This was the basics of person to person, or peer to peer loan. Of course, as society became more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Frequently, these businesses did not use their own money, but took deposits from people in the area who wanted to earn some return on their excess cash. The financial institution acted as an "intermediary", taking money from depositors and paying them interest at a certain rate, then lending that money to borrowers at a higher rate. The lending establishments made money paying interest on deposits at a lower rate than the interest they received on loan.

Today, an old but new phenomenon has come back, where holders of deposit funds are finding it more attractive and lucrative to make personal loans directly to the people who need them. Since the "intermediary" of a bank is eliminated, some people refer to this concept as disintermediation. Peer to peer loans work because they are traded on a marketplace, where individuals who have money they want to invest can be in touch with individuals who need to borrow money. Often these marketplaces are set up as auction sites, where the site assumes the responsibility of matching, credit checking and processing. The site connects the lenders and the borrowers in an auction process, very much like Ebay for goods, where the lenders compete with each other to provide the lowest rate to borrowers, and borrowers compete with one another to obtain the best rate for their personal loans. Both parties have an advantage by eliminating the middle man.

One of the greatest advantages of peer to peer personal loans is how they change the risk scenario for lenders. Frequently, personal loans are split up so that a lender lends his money to a number of different borrowers and, conversely, the borrower is receiving his loan from many different lenders. A good example would be a young man who decided to take out a loan for $1,000 for an engagement ring for his fiance. There may be an investor on the peer to peer lending site who is looking to lend $1,000. To limit his risk, however, each lender may only lend $100 towards this purchase. He may lend another $100 to someone else (who is borrowing $1,000 in total) to consolidate his debt, and another $100 to someone else for home repairs, and on and on for various kinds of personal loans. See more info at ny times website.

This $1,000 investment is, in this manner, going to be spread out over ten different risks, so that the overall risk is much lower than it would otherwise have been. The converse advantage for the borrowers is that they have a lot more lenders bidding for their personal loan business.

That this concept of direct personal loans from one person to another has been reborn should not be asurprise, since parties on both sides of the transaction benefit greatly. You can apply even for engagement ring financing.