Credit is scarce and interest rates are hammering investors. With the credit crunch making it tough for anyone to get a loan, “peer-to-peer lending” or “P2P” is thriving.

Increasingly becoming popular “P2P” websites are Prosper and Lending Club where lenders, lured by high interest rates, are linked with borrowers who need money for everything from home repairs to college tuition to debt consolidation.

An estimated return on investment at Prosper ranges from 7% – 13% while borrowers can loan money at a fixed rate of 7.5%APR. Lending Club investors earn average net annualized returns of 9.67% and borrowers can get a loan at fixed rates starting at 7.89%APR. These rates are current as of November 9, 2009.

Recent problems to the financial system contributed a great deal to the growth of P2Ps as people who need loans look for alternatives.

Investors at these P2P sites can enjoy greater returns but it also comes with greater risks. There are loans that may default even if steps are taken. Approach with caution if you are interested in investing and diversify your portfolio into many small loans to minimize default risk.

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