The Trayvon Trial

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Institutional investors are tripping over themselves to buy so-called peer-to-peer loans offered by a new breed of Internet lending companies, a development that could transform the nascent sector into significant player in the credit markets.

P2P lending, as it is known, started in 2006 with the founding of Lending Club and Prosper Marketplace. Back then, the idea was to match individual borrowers with small investors looking to lend as little as $25.

The loans often have interest rates low enough to make them a feasible way for individuals to pay off high-cost credit card debt, yet the returns to investors are attractive compared to many other fixed-income assets.

These developments have caught the eye of hedge funds, endowments, pension funds and even banks and insurers who want to put hundreds of millions of dollars to work.

The influx of institutional money is enabling online lenders, led by Lending Club and Prosper, to offer far more loans and compete more directly with traditional banks. Loan originations are growing at about 300 percent a year, according to the two market leaders.

But the arrival of Wall Street investors also brings new risks for the sector. Sharp changes in interest rates or another economic slump could prompt the new money to depart as quickly as it arrived. And questions remain about the way the peer-to-peer lending industry vets borrowers and whether interest rates on the loans properly reflect the risk.

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