According to TechCrunch, peer lending site the Lending Club, secured $24.5 million in Series C financing, led by Foundation Capital and joined by existing investors including Morgenthaler Ventures, Norwest Venture Partners and Canaan Partners.

Peer lending companies like Lending Club and Prosper are sites that connect lenders and borrowers in a transparent, social network style environment.  While certainly not risk free investments,  I believe these sites allow for a free-market solution to small-to-medium sized loans in an efficient way.  Through this direct approach,  these sites have the ability to eliminate layers of cost and bureaucracy that surround loans which, in theory, allows for lower rates for borrowers and higher returns for lenders.

While I do not believe that peer-to-peer lending will ever replace traditional loans, credit cards and big banks,  it’s inspiring to see a new asset class emerge that, one day, could compete with Wall Street, or at least influence the price of this amount of money.  When you consider the scalability of this model (assuming transparent information on borrowers remains available) and the extremely high APRs that credit cards can charge for small amounts of money, this outlet could potentially  become a real resource for consumers trying to lower their interest expense, or make small investments in their businesses.  If these sites reach their potential, they will become a natural anchor to credit card rates.   Additionally, with annualized returns over 9.5%, it’s not impossible for places like the Lending Club to pull in a large investment pool from a large group of small investors looking to diversify from the market and avoid paying management fees.

According to their blog, the Lending Club has issued a little over $100 million in loans since it’s inception and currently controls about 75% of the peer lending industry.  This is an extremely small piece of the lending pie,  but I’m hopeful that this industry wil continue to grow.  The real challenges that peer lending sites face is (again) one of network effects.  As a market making site, it’s important that borrowers and lenders can connect with similar risk profiles (lenders that are willing to accept risk for higher returns, and borrowers who are willing to pay higher rates with relatively low default risk).  I plan to open a (very) small account this month to get an idea of the lending process  and I’ll post again on this topic soon.

On another note,  the Lending Club website is a great example of what a startup site should look like.  The value proposition for lenders and borrowers is clear & upfront; there’s very little potential for anyone visiting the site for the first time to be confused.