How to Invest Through Peer-to-Peer Lending

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How to Invest Through Peer-to-Peer Lending

What is Peer-to-Peer Lending?

Peer-to-Peer Lending is also known as P2P, Social Lending, and Crowd Lending. Basically, it’s lending between individuals rather than through financial institutions. It’s been around since 2005. Therefore, it cuts out traditional banks by serving those without other funding options.

P2P capitalizes on modern technology and the power of social media. Most importantly, it’s a relationship between those with the means to help those in need of funds for various reasons such as consolidating multiple credit card debt and funding a small business. In addition to offering money to pay college expenses and paying off medical bills not covered by insurance.

Borrower Advantages

  • No need to leave home to apply for a loan.
  • The loan can be used for almost anything depending on the P2P platform.
  • It’s more accessible to those with low credit scores.
  • The two to three day loan process gets the money to the borrower faster.
  • Has competitive interest rates and fixed monthly payments.
  • Offers a better alternative to payday loans and credit card cash advances.
  • Helps build credit.
  • Proceeds deposited into bank account.
  • Some sites allow loan proceeds to be paid directly to a creditor.

Borrower Disadvantages

  • Higher interest rates for those with low credit scores.
  • Costly late payments.

Lender Advantages

  • Receive better return on cash savings than a bank savings account or CD.
  • Competitive interest rates.
  • 2% to 6% earnings depending on the amount and length of investment. Sometimes, the average annual ROI is higher.
  • Allows investment in a diversified portfolio.
  • Ability to spread risk across a large number of borrowers thus limiting potential losses.
  • A growing P2P market increases chances of further long-term growth in investment income.

Lender Disadvantages

  • Investment isn’t FDIC insured.
  • Increased chance of borrower defaults.
  • Have to manage collection process or use a collection agency.
  • Could have a lower ROI (Return on Investment) if loan is paid off early or late.
  • If platform ceases to exist, could suffer losses if there’s no contingency funds.
  • No liquidation of invested money until loan is repaid.
  • Poor economic conditions could affect borrower thus affecting investment.
How to Invest Through Peer-to-Peer Lending Money
Photo by David McBee from Pexels

What to Look for in a P2P site?

  • Type of loans offered.
  • Competitive interest rates.
  • Low fees.
  • Minimun and maximum loan amounts.
  • Full or partial loan investment.
  • Platform borrower default rate.
  • Qualifications set for borrowers.
  • Length of loans.
  • Qualifications required to become a lender.
  • Ability to diversify investment.
  • Platform average ROI.

How to Become a Peer-to-Peer Lender

  • Open account with P2P site.
  • Check fees on transactions and read the small print.
  • Review loan options.
  • Deposit money with site for loans.
  • Fund multiple small loans to minimize risk if borrower defaults.
  • Keep tabs on earnings. You only pay taxes on gains.

Some Websites that Facilitate the Lending Process

  • Lending Club – Founded in 2007. Offers loan investments for debt consolidation and auto loan refinancing. Has over 3 million members.
  • SoFi – Founded in 2011. Offers student loan refinancing, personal loans, and mortgage loans. Has over 2 million members.
  • Prosper – Founded in 2005. It’s the first P2P lending marketplace. Has provided loans to over 1 million people. They offer loans for debt consolidation, home improvement, and healthcare.
  • Funding Circle – Founded in 2010. It’s the largest online small business loans provider. Has provided loans to over 100,000 small businesses worldwide.
  • Peerform – Founded in 2010. Offers person loans.
  • Upstart – Founded in 2012. Offers loans to pay off credit cards, consolidate debt, car refinancing, and loans for other reasons. Has provided loans to over 1 million people.
  • StreetShares – Founded in 2013. Offers loan investments for small business owners.
  • Best Egg – Founded in 2014. Offers loans for debt consolidation, credit card refinancing, home improvements, moving expenses, major purchases and other reasons.
  • Kiva – Founded in 2005. An international nonprofit that offers small business loans. Has almost 2 million lenders. Offers lenders the opportunity to fund loans with as little as $25.

In Conclusion

When it comes to investing, there’s always a risk. However, if you consider your options and diversify your investments, you can lessen your risk. If you have some extra cash and want additional monthly income, becoming a peer-to-peer lender may help your bank account and quality of living. Plus, you’ll be helping those who aren’t able to get loan approval from traditional financial institutions. Therefore, peer-to-peer lending allows you to assist in providing a valuable service while making money in the process.