In recent years, the peer to peer lending industry has seen impressive growth. According to studies, the industry is expected to have a CAGR of 25% until 2025, when it will reach more than $850 billion. The industry is currently dominated by companies like Lending Club, Prosper, Upstart, and Bondora Go&Grow.
- 1 How peer to peer investing works
- 2 Why People Use Peer to Peer Marketplaces
- 3 Lending Club
- 4 Prosper Marketplace
- 5 Upstart: Funding the underbanked
- 6 Funding Circle: BusinessLoans
- 7 Sharestates: for accredited investors
- 8 More lending platforms for investors
- 9 Takeaway: focus on the large ones
- 10 Conclusion: Should You Invest in Peer-to-Peer Lending?
How peer to peer investing works
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.
Why People Use Peer to Peer Marketplaces
There are a number of reasons why many Americans are turning to the peer to peer lending marketplaces.
- After the financial crisis of 2008/9, many Americans felt betrayed by the financial system, They hated the idea of the taxpayers bailing out the big banks like Goldman Sachs and Morgan Stanley. As a result, they turned to the alternative lending industry.
- Applying for a loan in these platforms is generally easy. This is because it just involves a few steps that can be made using a smartphone.
- The credit offered by these companies is often cheaper than that offered by banks and credit cards. This is because unlike a bank that has many operational expenses, the peer to peer lending platforms are usually online-only. As such, they can pass on the costs to the consumers.
Borrowers are using p2p lending sites and apps mostly for personal loans. You may also find people searching for personal loans with bad credit. Interest rates tend to be higher for the latter type of borrowers.
Peer to peer returns
For investors, the peer to peer lending marketplaces provides them with an alternative avenue to make money. This is because the industry has become a separate asset class in itself, which allows investors - individuals and institutions - to lend money to customers and make good returns on their investments in peer to peer loans.
In addition, the companies in the industry have created specialised algorithms that help to detect a customer's credit rating and their chances for defaulting.
Finally, for investors, the platforms are easy methods of investing their money. As with borrowing, all an investor needs to do is to deposit funds and then lend. Some platforms like Lending Club have algorithms that can automate the process.
Lending Club is the biggest peer-to-peer lending company in the United States. In 2018, the company provided loans worth more than $10 billion. It has more than 200K investors and more than 3 million borrowers. The company has a market capitalization of more than $1.2 billion and generated revenues of more than $694 million in 2018, up from just $15 million in 2012.
Lending Club offers loans to individuals and small businesses. These loans are used for auto refinancing, health, home improvement, and major expenses among others. In total, it has provided credit worth more than $45 billion. For investors, the chart below shows a hypothetical example of the amount of money you can make.
As an investor, there are a number of reasons you might want to consider investing in peer to peer loans through the Lending Club.
- It is the largest in the industry. As mentioned, it has more than 200K other investors. Being large enables it to spend money on marketing and developing the platform.
- Since it is a public company, you have access to the inner-workings of the company through its disclosures. These disclosures includes the quarterly earnings, annual report, and conference calls.
- It has great historical returns. In its website, it says that the historical returns have 4-8%, which is higher than what you would receive when invested in the treasuries. In addition, the company says that 99% of its portfolios see positive returns.
- Investing in the company is a simple process that takes less than 10 minutes. As you invest, you have the quality data like the credit ratings that were in the past reserved to banks and credit unions. Finally, you receive the interest payments to your account every month.
Prosper is another marketplace that has achieved a lot of success in the past few years. According to the company, it gave out loans of more than $2.8 billion. Since inception, the company has given out loans worth more than $14 billion.
To invest in the marketplace, all you need to do is to sign up, explore the borrowers who are listed, invest in the customers or let the system do it for you, and then earn the returns as the customers pay back the cash. The chart below provides a summary of what the company offers.
As an investor, you should invest in Prosper because of its proven track record in the industry, its returns, which average about 5.3% annually, and the simplicity of investing.
4 Reasons why you should consider Prosper Marketplace.
- The second biggest peer-to-peer lending company in the US.
- A well-known brand with great customer reviews. 85% of its customers have received returns that have exceeded their expectations.
- Easy to get started. You can start with as little as $25.
- Quality borrowers with an average annual income of more than $107K.
Upstart: Funding the underbanked
In the United States, there are other peer-to-peer marketplaces that you can invest in. For example, Upstart, which was established in 2014 has already offered loans worth more than $3.4 billion. The key difference between Upstart on the one hand and Lending Club and Prosper on the other hand is that it targets fresh graduates, who don't have the required credit score.
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. The chart above shows a summary of the company's loans.
Key benefits of investing in Upstart:
- Higher returns than other p2p platforms.
- Easy to start investing.
- Average annual income of borrowers is more than $80,000.
- Automated investing capability.
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.
4 Reasons why you might want to consider using Funding Circle:
- One of the biggest P2P companies in the world.
- It is an easy process to invest.
- It only invests in companies, making defaulting a bit hard.
- It handles everything for you if a business is unable to fully repay their loan.
- Use of rigorous technologies to assess risks.
- Transparent pricing of just 1%.
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.
Benefits of investing using Sharestates:
- It is a simple process that takes less than a day to complete.
- An ideal way to invest in real estate.
- Access to investing in collateralized non-performing loans.
- High yields of between 8% and 12%.
- Relatively safe investments.
More lending platforms for investors
Other than these P2P lending platforms in the US, there are other types of alternative lending platforms. For example, there are companies like Microventures, Kickstarter, and CircleUp that allows you to invest in small startup companies.
Also, new lending platforms pop up on a regular basis. Also outside of the United States. In other countries you may find even higher returns.
Takeaway: focus on the large ones
As an investor, one way of diversifying your returns is by using the peer to peer lending platforms. While more and more platforms are coming up by the day, you should focus on the large ones like those covered in this article. Investing in these companies will give you diversification, high returns, and a good spirit knowing that the returns are making passive income.
Conclusion: Should You Invest in Peer-to-Peer Lending?
With this knowledge, the question is on whether you should invest in the peer-to-peer marketplaces in the first place. While the platforms offer a great way to diversify your income, I believe that 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.