There was a time when the way for a borrower to receive a loan was to work with a bank.
But over the last decade, a new form of lending called Peer-to-Peer Lending (P2P for short) has seen a tremendous amount of growth and attention.
Peer-to-peer lending is the process by which borrowers seek funding for a project or other kind of loan through non-traditional means by connecting with private lenders.
In this case, the private lenders are you and others with cash available to lend.
The growth of peer-to-peer lending platforms has enabled this transaction to be far easier than it once was.
These P2P platforms work by creating a marketplace by which borrowers and lenders can connect and fund projects.
Rather than funding the loans, peer-to-peer platforms focus on facilitating the transaction between the borrower and the lender.
For the borrower, P2P lending platforms allow them to seek funding they would have had a harder time securing through traditional means.
Borrowers may be requesting funding for anything from a business loan to student loan refinancing to personal loans. These options vary by platform.
For the lender, the return is in the interest rate on the loan. Like real estate crowdfunding, investors seeking a return on their money will be providing loans to individuals and their return will be based on the interest rate of the loan.
Rates on loans vary from platform to platform and loan to loan.
Of course, each loan also carries its own form of risk that needs to be evaluated before any kind of investment.
1% - 6%/yr
Up to 100K miles
- Why We Like IT
- Pros & Cons
Through personal loans, auto refinancing loans, business loans, and medical financing LendingClub offers the borrowing and investing solution right for you.
- Access to consumer credit investments
- Potential for higher returns
- Automated investing options
- 1% annual fee
- Returns are not fixed
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- Pros & Cons
Prosper makes personal loans easy. Whether you're consolidating debt or remodeling your home, we have a solution for you.
- Ability to invest in consumer credit
- Great loan search features
- Automated investing options
- Not available in every state
- Loans are unsecured
Is Peer-to-Peer Lending Safe?
Just like any investment, P2P lending carries risk and no return is guaranteed by any P2P platform.
Any platform guaranteeing a certain return on your investment is up to something shady. An investment is only an investment because it carries certain risks and rewards. Peer-to-peer lending is no different.
That said, most peer-to-peer lending platforms provide education and information about their investments so you, as the investor, understand what risk you are taking on.
These platforms will also advocate for diversification across your P2P investments in order to limit risk.
Additionally, most P2P platforms will perform credit checks on all potential borrowers. The P2P platforms use these credit checks to evaluate the trustworthiness of borrowers.
An optimal strategy to reduce risk is to invest smaller amounts of money across multiple loans instead of putting a lot into a single loan.
The diversification across loan types, loan amounts, and loan risk can help reduce overall risk to the investor.
Is Peer-to-Peer Lending Secure?
The process of peer-to-peer lending can be considered safe by most standards in the United States.
Major P2P platforms have security measures in place to verify identity and encrypt each webpage.
Loans are reported to all major credit agencies and there are collection agencies available to help you recoup your investment in case of default.
Peer-to-peer loans are not guaranteed, but the security measures put in place by lending platforms should provide confidence to investors that their transaction is happening the way they expect it to.
4 Best Peer-to-Peer Lending Platforms for Investors & Borrowers
Lending Club is an industry giant and one of the largest peer-to-peer lending platforms in the world. Started in 2007, Lending Club offers personal loans of up to $40,000 and up to $500,000 for businesses.
They offer a range of loan types for borrowers and investors to choose from. Borrowers have options such as a loan to consolidate credit card debt, loans for home improvement projects, and refinanced auto loans.
Lending Club’s interest rates on personal loans vary from 6.95% to 35.89% depending on the borrower’s qualifications and the type of loan.
Investing with Lending Club
Individual loans begin at $25 each, though an investor must transfer a minimum of $1,000 to open an account with Lending Club.
Lending Club offers a variety of accounts for investors including general investment, retirement, and corporate accounts.
When investing with Lending Club, your investments are broken into “notes” that combine to create an investment portfolio. One loan is equal to one note.
They promote a strategy of diversification across loan types, highlighting the advantages of doing so with a stat indicating that 99% of their investor’s portfolios with 100+ notes (loans) see positive returns.
The diversification process is simplified for investors with their built-in investment strategy options that range from lower risk to higher risk.
All loans with Lending Club are assigned a grade from A-D that reflects the credit risk of the corresponding loan.
Higher-grade loans have lower interest rates and a lower expected risk of default, while lower-grade loans have higher interest rates and a higher expected risk of default.
Their automation strategies are broken into two categories: Platform mix and Custom mix.
With the Platform mix, Lending Club automatically invests your money across all grades of loans. A Custom mix allows the investor to choose their own mix of notes (loans), leaving the choice of risk up to the investor.
An additional benefit for investors with Lending Club is monthly payments of principal and interest.
Receiving payments monthly can be more reassuring versus waiting until an entire loan is paid off and receiving a balloon payment.
Prosper was the original P2P lending platform, opening its proverbial doors in 2006 to borrowers and investors alike.
Their draw for borrowers is their low-interest rates, fixed monthly payments, and early payoff options without penalty.
Prosper offers multiple types of loans, from auto loans to home improvement loans to debt consolidation. Their unsecured personal loans range from 2,000 to $40,000 at fixed rates.
Interest rates through Prosper vary by loan type, amount, and the borrower’s credit score. A hard credit check is not performed, so seeing what kind of rate you qualify for never impacts your credit score.
Recently, Prospers has started offering HELOC, or Home Equity Line of Credit, loans for people in Alabama, Florida, and Texas with plans to increase the availability nationwide.
Investing with Prosper
The minimum amount to open an account with Prosper is $25, which is also their minimum investment amount.
Investment options with Prosper range from manual selection to their Auto Invest feature, which automatically invests your cash across a loan portfolio based on parameters that you set.
With Auto Invest, you are able to set a pre-determined allocation and Prosper will automatically invest your money any time there is anything remaining in your account.
Like Lending Club, Prosper grades loan types based on risk, with the “highest” grade equaling the lowest risk and lowest interest rates and the “lowest” grade equaling the most risk and highest interest rate.
Prosper’s grades range from AA to HR (with the HR standing for high risk).
Historical returns for investors with Prosper average between 3.5% and 7.0%, according to their investment page, with the highest returns averaging 8.1% for loans rated C through HR. The current fee to invest with Prosper is set at 1% annually.
YieldStreet is different than standard peer-to-peer platforms like Lending Club and Prosper.
With the latter, the focus is squarely on the borrower in need of a loan to consolidate credit card debt, refinance student loans, or make some home improvements.
With YieldStreet, there is no “borrow” tab or menu to select - instead, they have an option to “raise capital”.
YieldStreet’s loans are asset-backed - meaning they are backed by physical collateral like real estate or a business. This collateral acts as a protection in case the borrower defaults.
Investing with YieldStreet
Investors are the primary audience for YieldStreet, with their business model focused heavily around promoting the benefits of investing with them.
YieldStreet has received over $824 million in investors' funds and has made over 396,000 payments back to those investors.
The minimum to invest with YieldStreet is $5,000 and you must be an accredited investor to open an account and invest with YieldStreet.
They target 8-15% returns - a higher target mark than both Lending Club and Prosper - and reference a historical 12.28% IRR (internal rate of return).
Their loans are typically last 1-3 years in duration, meaning you don’t have to wait too long before seeing the benefit.
Their offerings are unique among peer-to-peer lenders, with specializations in real estate, commercial business, marine vessel investments, legal settlement cases, art, and more.
This unique selection allows investors to take advantage of opportunities they would not normally find on their own.
Because their offering is unique, there is a low correlation to the stock market.
And, according to their website, in times of market volatility, their investments are typically unaffected.
This supports the diversification of an investor's portfolio by protecting a portfolio’s value in times of market volatility.
When reviewing their open investments, investors are presented with extensive information about the opportunity including highlights, a “why we like this opportunity” section and a section on risk mitigation for certain circumstances.
At the end of this, they summarize the opportunity by also explaining how your investment is secured (via the asset) and how you will get paid.
Recently, YieldStreet started offering the YieldStreet Wallet - a feature that pays 1.95% interest on all cash sitting idle in your investment account with them.
This feature was added to help investors earn a few extra dollars while they wait for the right investment.
All investing and tracking can be done via YieldStreet’s mobile app, which brings the full functionality of their website to the tips of your fingers.
Upstart, founded in 2012 by ex-Googlers, provides personal loans to individuals with low credit or those who have a limited credit history.
The types of loans they offer include debt consolidation, credit card consolidation, home improvement, medical loans, moving or wedding loans.
They offer amounts between $1,000 and $50,000 with interest rates ranging from 5.59% to 35.99% and terms between 3 and 5 years.
The difference between Upstart and other lenders, including traditional lenders like banks and credit unions and other peer-to-peer lenders, is that Upstart takes more than just your credit score into consideration when reviewing a loan.
Most lenders only review a borrower’s credit score and history while Upstart also looks at education, what the borrower studied, and the borrower’s employment history.
The idea behind this method is that many borrowers with low credit or limited credit history can still be trustworthy borrowers, especially if they have an education in a lucrative subject and/or work history to confirm their ability to generate enough income to repay the loan.
Upstart also offers quick financing for borrowers, with money available as quickly as the next business day after the loan is approved.
Investing with Upstart
The advantage of investing with Upstart is in the way they evaluate loans. Instead of a simple credit check, Upstart looks at the education and employment of a borrower before making a loan decision.
By doing so, there is the potential to unlock additional investment opportunities that would not be available with other P2P lenders.
By expanding their approval search beyond just a credit score, they are able to identify borrowers who display the financial capability and/or capacity to repay their loans on time and in full.
To date, the average borrower with Upstart is college-educated (over 76% of approved loans), earns $81,000 per year, and has a credit score of 689.
These are the type of statistics that provide confidence and reassurance to investors seeking returns from in the P2P lending space.
The minimum to open an account and start investing is $100. In addition to a regular investment account, Upstart offers self-directed IRAs.
There is also an auto-invest option, where investors customize an investment plan and their platform automatically invests for you.
Why Investors are Turning to Peer-to-Peer Lending for New Investment Opportunities
There is no shortage of options for investors seeking new opportunities in the peer-to-peer lending space.
Each platform we reviewed offers something unique and different than the other, with each searching for and finding their own niche within the p2p marketplace.
The peer-to-peer market had an estimated global value of over $26 billion in 2015 with further expectations that it will reach nearly $900 billion by 2024, a massive growth projection with the CAGR (compound annual growth rate) at 48%.
P2P lending is already a huge industry, and it is only getting bigger. And it’s not just limited to the platforms above - P2P lending is also massive in the real estate crowdfunding industry.
With options abound, it’s only natural for investors to seek other forms of returns away from the stock market.
While that remains a sizable portion of many portfolios, alternative options available to average investors are at an all-time high.
As always, it is absolutely necessary to do your own research and evaluate what works best for you.
Every situation is different and each investor is in their own unique position. Some will have more capital than others and be willing to take on bigger risks, while others are seeking less volatility outside of the stock market.
Prosper makes personal loans easy. Whether you're consolidating debt or remodeling your home, we have a solution for you. It is a marketplace where individuals can either invest in personal loans or request to borrow money.
Jacob holds a bachelors degree in finance and has spent his professional career crunching numbers and mastering spreadsheets in the corporate world. He moonlights as a fantasy football commissioner, back-yard bbq amateur, and freelance writer/money blogger.