Best P2P Lending Platforms for Investors
Peer-to-peer (P2P) lending has emerged as an attractive alternative investment opportunity for investors looking to earn higher returns outside of traditional investments like stocks and bonds.
P2P lending connects individual investors directly with borrowers who need loans, cutting out the traditional financial middleman. For investors, P2P lending offers the ability to earn attractive returns while diversifying their portfolios.
In this blog post, we will look at some of the top P2P lending platforms that investors should consider. But first, we will look at What is P2P Lending?
What is P2P Lending?
P2P lending is a method of debt financing that connects individual investors/lenders with borrowers, without the need for a traditional financial intermediary like a bank. It is sometimes referred to as crowdlending. Through online P2P lending platforms, borrowers can get loans faster and investors can earn higher returns compared to savings accounts or bonds.
How Does P2P Lending Work?
P2P lending platforms use online interfaces to connect investors with borrowers. Prospective borrowers apply for a loan by submitting personal and financial information, which is used to generate a borrower risk profile and creditworthiness rating.
Investors browse loan listings on the platform and choose which loans to fund based on factors like the loan purpose, interest rate, and borrower rating.
Once a loan is fully funded by investors, the borrower receives the money minus an origination fee charged by the P2P platform. The borrower then makes monthly repayments on the loan with interest over a fixed term until it is paid off. Investors receive principal and interest payments each month from the borrower until the loan matures.
The P2P platforms generate revenue by charging origination fees to borrowers and service fees to investors. They handle tasks like collecting repayments, reporting to credit bureaus, and pursuing late payments. This automated process provides a hands-off passive income stream for P2P investors.
The Benefits of P2P Lending
1– Higher returns: P2P loans generate returns of 5-10% on average, much higher than savings accounts or CDs.
2- Low investment amounts: Many P2P platforms have minimum investments as low as $25 so it’s easy to start small.
3- Diversification: Investors can spread money across many loans to manage risk in a portfolio.
4- Shorter terms: Loan terms are often 3-5 years so investors get principal back to reinvest sooner.
5- Passive income: The investment process is automated after picking loans.
6- Helps borrowers: P2P loans provide affordable financing for borrowers.
The Risks of P2P Lending
P2P lending does come with some risks that investors need to consider:
1- Default risk: There is always a chance a borrower will default and be unable to repay.
2- Platform risk: A P2P platform could go out of business, disrupting loan servicing.
3- Liquidity risk: Most P2P loans cannot be sold easily before maturity.
4- Interest rate risk: Rising rates could attract investors away from P2P lending.
5- Recession risk: Loan defaults increase in economic downturns.
To mitigate risks, investors should create a diversified portfolio across many loans and platforms. Performing due diligence on borrowers and platforms is key. Overall, P2P lending offers attractive returns for investors comfortable with the risks involved.
Best P2P Lending Platforms for Investors
LendingClub is the largest P2P lending marketplace, founded in 2006 to facilitate unsecured personal loans up to $40K. It uses a proprietary loan grading system from A-G to evaluate borrower credit risk. Historical returns for LendingClub investors have been between 5-7%. The platform offers automated investing tools and portfolio management to simplify the investing process.
The minimum investment of $1K provides easy access for most investors. However, risks do exist around interest rate changes and the borrower defaults that investors must consider.
Prosper is a P2P lending pioneer, launched in 2005, that provides fixed-rate, fixed-term personal loans up to $40K. Prosper employs advanced data analytics for risk modeling and loan pricing to optimize rewards and minimize investor risks. Typical historical returns range from 4-7% for investors.
Prosper also operates a secondary market for trading existing loan fractions to provide some liquidity. Mobile apps and online tools make investing simple and convenient. But defaults and overall liquidity risk remain issues that Prosper investors face.
Upstart, founded in 2014, utilizes AI technology for credit evaluation and risk modeling for personal loans ranging from $1K to $50K. By leveraging alternative data, Upstart claims significantly fewer defaults compared to traditional lending, around 75% less. Upstart investors can earn attractive returns between 7-12% based on the AI-enabled risk grading.
The platform also offers easy to use interfaces and automated investing tools. However, Upstart is still relatively new with a short track record to assess long-term risks. The platform is also narrowly focused on unsecured personal loans.
PeerStreet provides a P2P lending marketplace for short-term, high-yield real estate loans to fund investments like rehabs or flips. Loans are graded from A-D based on factors like collateral value, borrower strength, and project merits. Returns typically range from 6-12%, higher than many consumer loan platforms.
The minimum investment is just $1K. But concentration risk exists due to the real estate focus. And loans cannot be sold on a secondary market, creating liquidity risks.
FundingCircle facilitates small business loans, operating globally to connect investors with established small businesses needing financing. Each business is evaluated using financials, credit, and business operations data. Investors can earn average historical returns of 7-10% across risk bands suitable for their risk tolerance.
You can start investing with FundingCircle with just $20. However, the platform is narrowly focused on small business loans. And secondary market liquidity is low, limiting options to exit positions early.
Here are some more bonus platforms for P2P lending:
1. Peerform – Offers personal loans with average returns of 7-12%. Uses credit models to assign loan grades. Minimum investment of $25.
2. LendingTree – Online lending marketplace for all types of loans including mortgages, personal loans, and business loans. Provides diversification.
3. StreetShares – Focused on small business loans to veteran-owned businesses. Returns of 8-12%. Minimum $25 investment.
4. Groundfloor – Specializes in short-term real estate loans with target returns of 10-14%. Invests in housing and commercial projects.
5. YieldStreet – Provides access to alternative investments like legal finance, commercial loans, and real estate. Targets 8-20% returns for investors.
6. Payoff – Strict borrower requirements (FICO over 700) limit defaults. Fixed 5-year loan terms. Target returns of 5-7% for investors.
P2P lending provides investors with attractive returns and diversification from traditional investments. The top platforms like LendingClub, Prosper, and Upstart offer easy-to-use websites, solid returns between 5-12%, and strong risk management. Each platform has unique strengths, whether it’s loan volume, data analytics, or default rates. Investors should consider their risk tolerance, return goals, and investment strategy to decide which P2P lending platform is the best fit for their portfolio. The sector provides exciting opportunities, but thorough due diligence is vital for succeeding as a P2P investor. Learn here more about passive income tips and guides.
Q: What is P2P lending?
A: P2P lending connects individual investors/lenders directly with borrowers through online platforms, removing the traditional financial middleman like a bank. Investors can earn higher returns while borrowers get access to affordable financing.
Q: How does P2P lending work?
A: Investors browse loan listings on a P2P platform and choose loans to invest in based on factors like interest rates, borrower’s credit, and loan purpose. The platform handles transferring funds from the investor to the borrower. The borrower makes monthly repayments until the loan is repaid.
Q: What are the benefits of P2P lending?
A: For investors, benefits include higher returns, low investment minimums, diversification, access to new asset classes, and passive income. Borrowers get fast financing and lower rates.
Q: What are the risks of P2P lending?
A: Risks include borrower defaults, platform failure, lack of liquidity, interest rate changes, and economic downturns increasing default rates. Diversification across loans can mitigate risks.
Q: What returns can investors expect from P2P lending?
A: Projected returns range from 4-12% on average, depending on the platform, loan types, and risk grades. Higher risk loans can generate higher returns when they repay successfully.
Q: How do I get started investing in P2P loans?
A: First choose a P2P platform, create an account, and fund your account. Review available loans, select ones aligning with your criteria, and fund the loans to start building your portfolio. Most platforms have minimums of $25 or $1,000 to get started.
Q: Are P2P lending platforms regulated?
A: In the U.S., P2P platforms are regulated by the SEC and must comply with applicable state lending laws. Top platforms adhere to best practices around security, data privacy, and transparent reporting.