Did you know that you can be your own bank and earn up to 7% per year?
All it takes is a minimum investment of $1,000 and an Internet connection.
The peer-to-peer lending space allows any investor to tap into consumer credit, an asset class, that until recently, was only available to institutional investors. If a business owner needs a loan, a homeowner wants to remodel their kitchen, or a recent college graduate needs to consolidate their debt, you can help them meet their goals and get paid handsomely in the process.
How to Start Investing in Peer-to-Peer Lending
The world’s largest peer-to-peer online lending marketplace, LendingClub has gone head-to-head with major banks to provide consumer credit. Thanks to low overhead, they can afford to give the bulk of the interest fees to investors. In return, LendingClub takes on none of the risks of the loans. The investors are providing all of the funds.
Here’s how it works:
- People apply for a loan. Whether it’s for a kitchen remodel, debt consolidation, or emergency funds, you’ll be able to see what each borrower is requesting and why.
- Lending Club screens and approves the applicants.
- As an investor, you can spread your account across “notes,” so you won’t have to risk tying up all of your funds with a single borrower. Each note is a fraction of a loan, so the more notes you invest in, the more diversified your portfolio.
To get more specifics, you can visit LendingClub.
Why Choose LendingClub
Historical returns on the platform average 4-7%, and you can structure your portfolio to increase or decrease risk. LendingClub also gives you the option to choose your investment strategy.
For example, you can choose to automate your strategy if you don’t want to spend a lot of time manually picking notes. When you automate your strategy, LendingClub does all the work for you, balancing your notes to achieve your desired rate of return.
Or, you can manually select the notes you want to invest in. This is where it can get exciting and even fun. You’ll have access to a list of all the people seeking credit. You’ll know why they’re requesting a loan, the total amount they need, the term of the loan, and their credit rating. You’ll even get an idea of the individual’s details, such as what city they live in, how long they’ve been employed, what their job title is, and even a summary of their credit profile.
Each month, you receive principal and interest as borrowers pay back their loans.
Is Peer-to-Peer Lending Risky?
The interest rates LendingClub charges tend to be higher than a traditional bank (ranging from 6.5% to over 35%). Though the company does require that borrowers have a passable FICO score and a reasonable debt-to-income ratio, they’re not as restrictive as banks. Borrowers have the advantage of getting loans for anything their hearts desire, including paying for a wedding, going on vacation, and handling emergency medical expenses.
The fast access to cash and the ability to use the money for anything is desirable for consumers, but investors should be aware of the default rate. Currently, LendingClub borrowers have a default rate ranging from 6-7%. Compared to the current mortgage default rate in the U.S. of less than 1.8%, and peer-to-peer lending does carry some risk.
To counteract that risk, LendingClub passes most of the proceeds to the investor, taking only a 1% transaction fee. They estimate that if your portfolio has an average interest rate of 14%, you can expect to net a return of 5% per year.
Alternatives to LendingClub
Though LendingClub is the largest peer-to-peer lending marketplace, it isn’t the only one you can explore. Here are some others you might want to investigate:
- Upstart – Founded by former Google employees
- Funding Circle – Focuses on small business loans
- Prosper – This company was the first online peer-to-peer lender
- CircleBack Lending – Similar to LendingClub, but they have a bit of a sleazy “Pay Day Loan” vibe
- Peerform – Founded by Wall Street executives that believe there are more predictive loan default measures than FICO scores
Bottom Line: Peer-to-peer lending can yield a high return, and you also get to help small businesses and individuals secure credit. We recommend taking a look at each of the marketplaces and determine which one best fits your risk tolerance.
