With the cost of college tuition rising every year, the government can no longer provide enough support to cover all college expenses. In addition with the ongoing credit crisis, funding for student loans given by banks and other private institutions has nearly dried up or become inaccessible. In the instances where students can obtain private funding, interest rates can be as high as 20%. Consequently, students are desperately looking for other sources of funding for their education.

A relatively new alternative to government and banking loans is peer-to-peer lending (aka p2p lending, social lending). With peer-to-peer lending, borrowers can get loans directly from a pool of private lenders. For students, peer-to-peer lending offers the promise of lower interest rates in comparison to traditional bank loans. The concept of peer to peer lending has been around for some time. It was initially used for funding micro loans for entrepreneurs in developing nations to start businesses. With almost perfect timing, peer-to-peer lending companies have emerged to offer help to those in need of funding, whether for debt consolidation, starting a small business, or going to college.

Currently, there are two peer-to-peer lending companies focusing primarily on student loans: Fynanz and GreenNote.

Fynanz offers repayment plans over five, seven, or ten years depending on the dollar amount of the loan. Like a normal student loan, students receive a grace period while in school and can delay principal payments for up to 2 years after graduating. With Fynanz, students can expect to receive a higher interest rate since lenders are guaranteed 50% to 100% of the principal if the borrower defaults.

GreenNote loans have a fixed interest rate that is equivalent to the current Federal Unsubsidized Stafford interest rate at 6.8%, which is a much lower interest rate than private or bank loans. They give students a grace period of six months after graduation, and repayment is made monthly over a ten-year period. No credit approval or credit score is needed since agreements are made between the students and people they know.

Virgin Money USA is another option for receiving loans if the student has a network of friends or family willing to lend money. Virgin Money simply acts as an intermediary by making the loan official and removing the emotional aspect of lending money to friends or family. Since the loan is between friends or family, the loan terms are completely flexible. The student and lender decide upon the interest rate and payments, not Virgin Money. Expect to pay $199 to $299 to setup the loan, and an additional $9 per month service fee.

Risk for Student Borrowers

For students, there are no real risks with peer to peer lending. Either the students receive funding or they are denied funding, like any other bank or federal loan they might apply for. A student’s loan will be funded if enough investors choose to fund it and the money is received up front. Lenders choose to fund loans based on the attractiveness of the student’s profile. Naturally, if the student has a high GPA, attends a prestigious school, and is majoring in a lucrative field, lenders will be fiercely competing to fund the loan. Students without stellar profiles can try soliciting funding from friends, family, or colleagues. Allowing Virgin Money USA or GreenNote to manage the loan will make the process official and thus be a more attractive investment to the student’s friends and family.

What’s the verdict?

Peer to peer lending is an excellent option for students in need of money. Overall, peer to peer lending offers an alternative but secure method for obtaining funding for college expenses beyond what federal loans, grants, or scholarships can cover.

So How Does a Marginal Loan Work?

The way margin lending works is that the loan you take out is secured against the shares or managed funds you invest in. For example, you could put $15,000 of your savings into an investment and then get a marginal loan for a further $15,000 doubling you investment to $30,000. You can invest with dipping into any of your own savings funds if you choose. For example, if you had equity in you home you could use the equity in your home to buy the initial stock and then take out a marginal loan to double your investment.

Who Should Do Margin Lending to Accelerate their Investments?

Margin lending is for those who have more to invest and wish to increase their exposure to the market, but you should also preferably have a high disposable income and be willing to take greater risks. You should also ensure that you have enough to meet any margin calls that may be made on you.

How to Protect Against Risks Involved with Using Margin Lending

Although margin lending can help you to accelerate your investments it also poses greater risks than simply investing your own money. To help cover these risks you should not invest all your available funds and you should spread your risk across a number of different sectors. Due to the increased risk you should also carefully consider how much you are actually going to take in margin lending so that you can accelerate your investments while still remaining reasonably safe.

How to Choose a Margin Loan

If you are new to margin lending and are currently looking for a loan, or if you are looking to renew a margin loan, how do you go about choosing the right loan? You should first look at what you want to invest in, what the loan-to-valuation and buffer margins are, how the margin is operated and what other fees are associated with the loan, and the minimum loan amount. Carefully look at all the information you are given about different margin loans and way these up carefully before deciding which loan you are going to work with.

Margin lending is useful to boost your investments as they allow you to invest more than you currently have available and so get greater returns. There is however greater risks involved with margin lending and steps should be taken to minimize these risks and your margin loan chosen carefully taking into consideration all the information you can get on the loan.

It is rooted with the idea that a bank should not play a large role and reap the majority of returns. In the model of social lending, the bank or financial institution facilitates the loans and get a small rate of return for doing so. In essence it is cutting down the middle man. To get the true underlying rationale, we need to examine the basic model of receiving a loan from a bank.

It begins with individuals using banks as a method of saving their money. The banks pay a low rate of return for the deposits as for the banks right to use the money for lending. On other side are individuals applying for a loan or mortgage. The bank takes the deposits it has and lends to the borrower at a much higher rate of interest. The difference in interest paid and interest earned is the bank’s revenue. In this model all of the risk is assumed by the bank. Meaning, the obligation of paying interest to the saver and preventing default of lent money is the risk.

With peer to peer lending the model is shifted. The bank or institution pays a much smaller role. An individual lender can choose what to lend and who to lend too and therefore majority of the profit from the loan is transfer directly to the lender. With this trade off of less bank involvement there is an increase in risk to the individual lender in the form of default. For the borrower, the benefit is more often than not a lower cost of transaction translating itself into a lower rate of interest on the loan.

How peer to peer lending is actually facilitated is an auction process with a basic market place provided by the lending institution. Which means the institution that processes the loans between individuals is the one that provides the method for individuals to find each other. Then the borrowers and lenders are able to select each other. Now, the lending to a person you have never met before does has its risk, but the presence and responsibility of the financial intermediary is to ensure individuals are accurately represented.

This is a concept would have never been considered until a few years ago. The internet actually is the stage that allows this to happen. The increase sociability of individuals caused by use of the internet provides this unique way to invest and borrow money never before possible.

The Mortgage Bankers Association identifies the following practices as predatory: “(1) steering borrowers to high-rate loans; (2) intentionally structuring high-cost loans with payments that the borrower cannot afford; (3) falsifying loan documents; (4) making loans to mentally incapacitated homeowners; (5) forging signatures on loan documents; (6) changing the loan terms at closing; (7) requiring credit insurance; (8) falsely identifying loans as lines of credit or open-end loans; (9) increasing interest rates when payments are late; (10) charging excessive prepayment penalties; (11) failing to report good payment histories to credit bureaus; and (12) failing to provide accurate loan balance and payoff amounts.”

These practices are widespread among some of the biggest players in the banking arena, particularly credit card issuers. For example, the FTC went after Citigroup (parent of Citibank) for deceptive lending practices, and Citigroup agreed to pay a $215 million settlement in September 2002.

Jodie Bernstein, director of FTC’s Bureau of Consumer Protection, said, “They hid essential information from consumers, misrepresented loan terms, flipped loans, and packed in optional fees to raise the costs of the loans.”

One area where predatory lending is rampant is in preapproved college student credit offers. Creditors extend lines of credit to students without requiring any type of income or credit track record, knowing full well that the students probably can’t repay, yet hoping that parents will step in and pay the balance-along with exorbitant late fees and interest.

More examples of predatory lending can be found in the fine print of cardmember agreements issued by creditors such as Discover Card. Discover has an arbitration clause in its terms of service credit card contract that bars consumers from taking part in class action lawsuits. In my opinion this is a predatory practice, and the California Supreme Court agrees: it has ruled such clauses unenforceable and unconscionable. However, other courts have found the practice acceptable, as in the case of Jenkins v. First American Cash Advance of Georgia, which upheld the class action waiver.

Banks have been doing this for hundreds of years. They take depositors money and make loans and mortgages with it. They pay a low interest rate to the depositor of the money and collect a higher interest rate from the borrower. So in a way people have been lending to people indirectly for a long time.

Peer to peer lending is what happens when there is less bank involvement. The bank in some sense becomes a financial intermediary that connects lenders to borrowers. The transaction are underwritten and facilitated by this intermediary but in exchange for less involvement they ask for a small return. Often this takes the form of fees for doing the loan and a small piece of the interest rate charged to the borrower. Since the money is coming directly from individual, the risk in some ways transferred directly to the individual lenders. Moreover, since there is a transfer in risk, the return must be higher for the individual lender.

Now, are you already thinking that this is for you or no way? Well, you might already come to the conclusion that if you are a saver, you want no part. This is understandable and there are very specific reasons as to why. First, why are you putting you money in the bank anyway? The answer more than likely is that is safe. The banks do not expose you to any of the risk on the loans they give. In return you get a low interest rate. Second, the money you have is liquid. You can get it at any time and regardless of the bank lent your money previously they must honor your withdrawal. If you lend your money in peer to peer lending, your loan pays over time and it is impossible to truly get your money out without selling your right to the loan.

We have only talked about risk, but there are the returns. If you this has sparked your interest, you could be an investor. The returns listed by lending club.com are anywhere from 6.69% to 19.37%. This is a far improvement over what banks are paying in savings accounts. Furthermore, every loan is underwritten by the financial intermediary, checking borrower’s income, credit statement, credit rating and background. They handle as a normal loan by a bank and borrowers that don’t meet quality standards are declined. The default rate listed also by lending club is 2% in last 120 days. Lastly, there is potential of diversification with peer to peer loans. You don’t have to fund just one loan but several. This spreads you money out between several different loans and loan grades further hedging your ability to avoid default by borrowers.

Now, savers are not investors and vice-versa. It depends on what you are actually looking to do with your money. You always need to weigh your options or seek professional advice, but peer to peer lending could provide one way for a saver to become an investor.