The peer to peer lending industry has seen impressive growth in recent years. The industry is expected to keep on growing with 25% yearly, until 2025 when it will reach a market worth more than $850 billion. This industry is currently dominated by companies like Lending Club, Prosper, Upstart, Funding Cirlcle and Bondora.
If you are searching for a good way to make passive income, then investing in these peer to peer lending platforms are a viable option. Have you started investing in stocks already, then consider a more diversified portfolio by investing in consumer and corporate credit. One way of doing that is by using Lending Club, but we also offer a comparison between the best peer to peer lending platforms for investors so you can have a more indept look.
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Why Investing in peer to peer lending
As an investor, you are always in search for opportunities to grow your wealth. In the United States, one of the best places to invest is in the stock market. Over the years, people who invested in stocks have seen some of the best returns. In the past five years, people who invested in the Dow Jones Industrial Average (DJIA) have seen returns of more than 50% while those who invested in the S&P 500 and Nasdaq have seen returns of 50% and 80% respectively.
While it is safe to invest in the stock market, it does not hurt to be a bit diversified. In fact, investors who have diversified among various asset classes have seen better returns. One area that is emerging is on peer-to-peer lending.
This peer to peer lending could be a great addition to a diverse investment portfolio. However, if you’re new to investing, we would recommend you to consider investing in stocks. If you are not an experienced investor or stock picker, you could start with investing in indices or low cost Exchange Traded Funds (ETFs). This method has shown a lot of success over the years. In fact, stocks have more than doubled in the past ten years.
What is Peer-to-Peer Lending?
How many times have friends borrowed money from you? If they do, chances are that you rarely charge them interest for the borrowed funds. Also, chances are high that some of these friends don’t pay back the money.
However, in the United States, many people with good credit are constantly looking for money to fund emergencies, renovate their houses, and travel. Some of these people are turning to peer-to-peer lending platforms to borrow money. This article will explain how peer-to-peer lending works and how you can take part in it to make money.
The peer-to-peer lending operates in a similar way to the traditional banking. In traditional banking, customers deposit funds, then the banks lend these funds to other people. They do so after analyzing their probability of paying the money. Some of the tools they use are credit scores and the probability of the customers to pay. After lending the funds, the banks generate income from the interest they charge.
- High returns. Most platforms claim that their returns are higher than those of treasuries.
- Diversifying your income.
- Easy process to invest because it takes just a few clicks.
- A good way of generating passive income.
- Automated investing.
How peer to peer investing works
The peer-to-peer lending operates in a similar way to the traditional banking. In traditional banking, customers deposit funds, then the banks lend these funds to other people. They do so after analyzing their probability of paying the money. Some of the tools they use are credit scores and the probability of the customers to pay. After lending the funds, the banks generate income from the interest they charge.
The industry works in a very simple way. In the marketplace, people and companies in need of credit can apply and get it within a short period of time. On the other hand, investors, who are in need of yield can deposit money in these companies and then lend to these people. The lending companies like Lending Club generate their profits by taking a cut of the interest rates paid by the borrowers.
In P2P lending, the companies have developed algorithms that combine the credit scores with other behaviors of the customers to decide whether they can pay. Then, as an investor, you go to these websites, create an account, and lend money to the borrowers based on their scores. As an investor, there are a number of benefits you get from investing in peer to peer lending platforms.
Should You Invest in Peer to Peer Lending?
With this knowledge, the question is whether you should invest in peer-to-peer marketplaces in the first place.
While the platforms offer a great way to diversify your income, you can generate better returns in the stock market. Even if you don’t have the time to invest, your funds can do well invested in index funds.
For YTD, the top indices in the United States like Nasdaq and S&P have returned more than 15%. This is more money than you will make in the peer-to-peer lending space. If you are an experienced investor, you can also generate better returns by selecting individual stocks. For example, a company like Apple has returned more than 20% this year.
Therefore, if you don’t have the knowledge and expertise to invest, you can set aside some of your funds in the peer-to-peer marketplaces. The other portion of your funds should go to other asset classes like stocks and indices.
As an investor, one way of diversifying your returns is by using the peer to peer lending platforms. While more and more platforms come up everyday, you should focus on the best peer to peer lending platforms. Investing in these companies will give you diversification, high returns, and a good spirit knowing that the returns are making passive income.
Peer to Peer lending examples
LendingClub: largest peer-to-peer lending platform
In October 2020, Lending Club ceased all new loan accounts as it is transitioning into an online bank, LendingClub Bank, after the acquisition of Radius Bank. As of December 31, 2020, Lending Club no longer operates as a peer-to-peer lender.
LendingClub is the biggest peer-to-peer lending platform in the United States. The company was started in 2006 and is listed in the New York Stocks Exchange (NYSE). In 2018, the company generated more than $695 million and has a current market capitalization of more than $1.5 billion.
To invest in LendingClub, all you need to do is to create an investment account, deposit funds and pick a strategy. With the company, you can select the notes you want to invest in or you can let the algorithms do it for you. After this, you will receive your interest income, which you can withdraw or reinvest.
Prosper: Easy to get started
Prosper is the second-largest peer-to-peer lending platform in the United States with more than $14 billion in total funding. The company was started in 2005 and has offered loans to millions of people. Like with LendingClub, all you have to do is to create an account, browse the loans of credit-worthy borrowers according to their FICO scores, and then invest. You can select the individual loans or use the auto invest tool to to build your target portfolio. Finally, your return will be deposited to your account.
Funding Circle: BusinessLoans
Unlike Prosper and LendingClub, Funding Circle specializes on business loans. Over the years, the company has invested more than $9 billion in companies from around the world. It has more than 85K investors, who include individuals, national banks, and governments.
Like with the previous platforms, all you need to do is to create an account, fund it, analyze investments, and make the investments. To do so, the company accepts a minimum of $25K and to promote diversification, only 2% if the total funds can be invested in one note.
Sharestates: for accredited investors
Sharestates is a totally different peer-to-peer lending marketplace because it targets only accredited investors and institutional investors. The company gives these investors access to a marketplace that is made up of mostly real estate professionals. To reduce risks on the investments, the company has developed a 34-point underwriting process that has proven to be effective over the years. Individual investors are required to start investing with as little as $5000.
Upstart: Funding the underbanked
Upstart is a relatively new peer-to-peer lending platform launched in 2012. Since then, the company has raised more than $144 million in venture funding and disbursed more than $3.4 billion. The company’s operating model is similar to that of LendingClub and Prosper.
The main difference with LendingClub and Prosper is that it targets people who are underbanked such as recent graduates. These people don’t have enough credit scores. Instead, the company has developed its own criteria of evaluating the creditworthiness of the customers. As a result, the returns tend to be higher – and risky – than those of the other peers.
