Peer to Peer lending – brilliant or insane?

I’m quite fascinated with the emergence of Peer-to-Peer lending.

Excuse my ignorance if I am wrong but isn’t this essentially how banking started out in the first place?

Ok, I’ll admit I got that information from Deadwood, but moving swiftly on the overall premiss as I understand it is that instead of saving your pennies at your local bank or building society, you invest it in one of the (currently) three companies Zopa, Rate Setter and Funding Circle offering peer-to-peer lending and they then loan it out in very small increments in order to offset your risk. So if you invest say £5000 they might spread that across 500 different loans to protect your investment as much as possible and the interest rate is higher than you can currently get from the banks. Plus, at the moment, you even get to choose what rates you would like to set!  Here is the BBC’s take on it.

Personally, while I do think it is a lovely idea, I wouldn’t want to take the risk as the investments are not regulated and the investments are all made at your own risk. Therefore there are no guarantees that you would be able to get your money back! I do think that a lot of people will make a lot of money from this but I also think that at some point (possibly as less scrupulous companies get involved) it will go horribly wrong and people will lose their investments.

What do you think? Would you invest in one?