Peer to Peer lending (P2P) is a new way to make money by lending out what little money you have, it is a lot like crowdsource funding but for loans. Depending upon your risk tolerance and investment amount you can returns of 5% up to over 10%. The basic idea is that the lending company you use is the middleman in the operation. People apply for loans and the lending company makes sure that their paperwork is in order and that their finances are what they say they are. The loan application is rated (A->G) based upon the creditworthy status of the applicant and put on an online board.
The investors (us) open an account with the lending company and fund the account with a bank transfer. Now we look at the loans on the online board and decide which ones we want to fund. The best part is that we do not have to fund the whole loan, we can put in as little as $25 towards the loan. Then, once the loan has been funded and confirmed it is issued.
When the borrower pays their monthly payment the lending company takes their cut (about 1%) and the rest gets split up among the investors. For each $25 you put in you get about 75 cents every month, depending upon the loans interest rate and duration. Of course, there is a chance that people will default on their loans but, fortunately, the sites have enough data to factor that into account when calculating what sort of return you will get on your investment. That 75 cents per month can be reinvested when it reaches the $25 threshold which, if you have 100 notes, happens 3 times per month.
Each investment unit is called a "note". Your best bet to invest in this is to put as little as you can on as many notes as you can. You are better off having $25 on 100 notes than you are having $2500 on one note. By spreading the risk if one or two loans fail then they do not bring down your entire account. Each site has its own recommendations for how much you should invest but the general opinion seems to be about 100 notes. You can buy them over the course of time but it is important to make sure that you reach the threshold of 100 notes in order to protect your investment.
Some of the Peer to Peer sites have a setup called "Auto Investing" which is where you can let the system manage the investments for you. All you do is to set up what percentage of the overall account you want to be invested in each grade of loan and the system will automatically buy loans when the account has enough cash in order to make the account match the target that you set. You can also add some more criteria to the auto investing such as only allowing notes that are 3 years in length etc...
I am not a tax professional, please consult one for the final answer. However from what I can see the interest that you receive is payable as regular interest income on your taxes. Most of the 75 cents per month per note that you receive is principal which is not taxed but a fraction of the payment is considered interest income. One advantage of this is that the taxes are paid across many years so when you want to withdraw the money you can do so without penalty much like withdrawing cash from an ATM.
Lending Club - www.lendingclub.com
Prosper - www.prosper.com
PeerForm - www.peerform.com
...and many others...
www.lendingmemo.com/p2p-lending-sites/