This guest post was written by Peter Renton, (@SocialLoans), Editor & Publisher of peer-to-peer lending blog, Social Lending Network.

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With the launch of Prosper in Feb. 2006, peer to peer (P2P) lending arrived in the United States with great fanfare. Borrowers no longer needed banks. Individual investors could be the banker and earn great returns.

But, there have been challenges along the way. In 2008, the SEC decided P2P lending should be regulated as a securities business and both Prosper and Lending Club, which launched in mid-2007, were shuttered for half a year as they retooled. Both companies also initially struggled with higher-than-expected default rates.

It is only now that P2P lending appears to be living up to that initial promise. Last month was the best ever as lending volumes broke the record for the seventh month in a row. The combined volume of Prosper and Lending Club amounted to $25.6 million in June compared with $12.2 million a year ago, a 110% gain. As you can see in the chart below, the growth curve has been getting steeper.

 
Source: Companies, July 2011
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What is driving the growth?
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1. Credit card interest rates remain high
The most common type of loan by far, on both Lending Club and Prosper, is debt consolidation. People are trying to dig themselves out of credit card debt where rates can climb north of 30% if a payment is missed. In comparison, someone with good credit can get a 36-month P2P loan at 12% to pay off their credit cards in three years.

2. Home equity loans are very difficult to get
Before the real estate bust, banks pushed home-equity loans aggressively. No more. It now takes great credit and substantial equity to qualify. Last month Lending Club reported that 14% of its loans were used to fund home-improvement projects. Prosper said that number was 12%.

3. Investors can earn double-digit returns
It has been two-and-a-half years now since the Federal Reserve dropped its target-funds rate to zero. Fixed-income investors have been stuck with returns in the low single digits. Investors are looking for yield and some are considering alternative asset classes like P2P lending where returns are averaging around 10%, though it’s yet to be seen if that return holds as the loans season.

Prosper CEO Chris Larsen attributes the high investor returns to the startup’s five years of experience. He said, “Since re-launching our platform in July 2009, we’ve delivered returns of 10.4% and default rates of 5.3% and lenders are responding favorably.” Their recent performance backs up these statements.

4. Institutional investors are taking notice
Lending Club says that currently about one-third of investor money comes from institutional investors. In May, Prosper took on a new institutional lender who has invested close to $2 million in just two months and has pledged a whopping $150 million in the future. Prosper expects the balance of individual to institutional investor to resemble more of a 50/50 split as the category continues to grow. Clearly some of the big-money players are starting to allocate assets to P2P loans.

5. The IRA option
For a couple years now, Lending Club has offered an IRA option they say has proven to be popular. “Investors planning retirement are less concerned with near-term liquidity and are more interested in consistent returns and the ability of an investment to generate cash flow,” explained Scott Sanborn, CMO at Lending Club, “and we find existing investors who have been pleased with their returns who are opening larger IRA accounts to let their investment grow tax deferred.” Prosper does not officially offer an IRA although it is possible to set up a self-directed IRA with Prosper.