P2P Lending
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What is Peer to Peer (P2P) Lending?

The practice of lending and borrowing dates back to the prehistoric times, or Mesopotamia, to be more specific. Ever since then, it has taken many forms and has been developed through various types of institutions, but at its core, it has remained the same. There is someone who needs a large amount of money on one end, and someone who has a surplus of money and wants to invest it on the other. Nevertheless, even though the essence of lending remains unchanged, there have been many changes regarding numerous other aspects.

P2P Lending / P2P Investing
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One of the most recent innovations in this field is P2P lending (a.k.a. P2P investing), which attracts more and more people across the world, both lenders and borrowers. And indeed, this method has proved to be a great way to circumvent the traditional banking system, opening new doors and solutions to both ends of the spectrum. If you are wondering what P2P investing is and whether you should start investing in P2P loans, read on.

What is P2P lending?

Finance
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P2P (peer to peer) lending is the practice of lending and borrowing which is not implemented through banks. Instead, it mostly consists of online lending realized through various P2P platforms. These are websites that connect borrowers and private loan lenders to create a sustainable lending community. Unlike traditional banks, which usually offer low annual interest rates to investors and high interest rates to borrowers, lending platforms offer much better conditions to everyone involved. This is a direct consequence of there not being a middleman (i.e. the bank). Due to the fact that P2P lending requires less employees and no physical branches, this business produces only a fraction of the cost that the traditional banking system does.

Top 5 Peer-to-Peer Lending Sites in the UK

RateSetter
Ratesetter Logo RateSetter is a peer-to-peer platform offering clients several different options to invest and to borrow at attractive rates. Founded in 2010, RateSetter operates in the UK and is regulated by the FCA. RateSetter protects its clients with the ‘provision fund’ tool which reduces borrowers default risk. 

A loan amount at RateSetter ranges depending on the type of the loan: For personal loans, the amount ranges between 3000-24,000 at low rates, loan dealer finance ranges between 25,000-500,000, property development loan 500,000-7.50M with Max. 70% loan to value / 80% loan to costs, and family finance loans up to 500,000.

Pros

  • Offers the ‘Provision Fund’
  • Regulated by the FCA
  • Low default rates
  • Offers a retirement account

Cons

  • Low investment diversification

Portfolios

  • Personal loans
  • Business loans
  • Auto refinancing
  • Student loans
  • Patient solutions

Accounts

  • ISA
  • Everyday Investing
  • SIPP

Best for

  • Small business
  • Real estate
  • Personal loans
  • Education loans
  • Medical solutions
Lending Works
Lending Works Lending works is a British peer to peer lending platform that connects investors and borrowers with safety measurement for its clients. Perhaps the biggest edge of Lending Works is the Market-Leading protection that protects investors against a cause of borrower default. Loans at Lending Works range from £1000 to £25,000 for all types of loans in time periods of 1-5 years.

Pros

  • Market-Leading protection
  • FCA regulated
  • Auto reinvesting

Cons

  • 0.6% early exit fee
  • Not enough information

Portfolios

  • Personal loans
  • Auto refinancing
  • Patient solutions
  • Student loans
  • Business loans

Accounts

  • 5% return for loans up to 3 years
  • 6.5% for loans up to 5 years

Best for

  • Real estate
  • Education loans
  • Personal loans
  • Medical solutions
  • Small business
ZOPA

ZOPA

Founded in 2005, ZOPA is the first and one of the largest peer-to-peer lenders around the UK.  ZOPA offers low returns compared to other P2P lenders in the industry via a n easy to use process. The minimum amount you can borrow at ZOPA is £1000 and the maximum amount to lend is £25,000 over time frames of 1-5 years.

Pros

  • Low returns
  • FCA regulated

Cons

  • Limited range of products

Portfolios

  • Personal loans
  • Auto refinancing
  • Student loans
  • Business loans
  • Patient solutions

Accounts

  • ZOPA Core
  • ZOPA Plus

Best for

  • Education loans
  • Personal loans
  • Medical solutions
  • Small business
  • Real estate
FundingCircle

Funding Circle

FundingCircle is a business peer-to-peer lender connecting investors and enterprises in the UK. FundCircle service revolves around small businesses searching for faster funding that can take up to 10 days. The maximum loan amount is between £10k – £500k in time periods of 1-5 years with rates starting from 1.9% per year. For those who would like to invest their funds through FundingCircle, the company offers a yearly return of 5.5%-6.5%.

Pros
  • Provides risk management
  • Suitable for small businesses
  • Fast and easy-to-use online application
  • Low rates for borrowers compared to others P2P lenders in the industry

Cons

  • No protection for investors – Unsecured loans
  • Strict qualification requirements

Portfolios

  • Business loans
  • Personal loans
  • Auto refinancing
  • Patient solutions
  • Student loans

Accounts

  • Classic Account
  • ISA Account<

Best for

  • Small business
  • Real estate
  • Education loans
  • Personal loans
  • Medical solutions/li>
Azzets Capital

Assetz Capital

Assetz Capital is a peer-to-peer marketplace connecting borrowers and investors offering attractive rates and returns. Assetz specializes in property and small business lending and provides a variety of accounts for those who want to invest.

Assetz Capital loan amount ranges on various products: For commercial mortgages, the loan ranges between £200-£2.5M with a commitment term of up to 5 years in rates starts at 6.9%, for a secured SME term, the loan amount ranges between £200,000-£2M with a commitment term of up to 10 years in rates starts at 6.9%, development finance loans range from £500,000 to £7M in rates starts at 7.4%, the development finance with presale loans range between £1M-£7M in rates starts at 7.4% and the bridging finance loan ranges between £250,000 to £2.5M in rates starts at 8.0%.

Pros

  • Variety of investments accounts
  • High returns for investors and low rates for borrowers
  • Offers Secured SME Term Loans
  • Loan are asset-backed
  • Transparent service

Cons

  • Minimum loan size starts at £100,000

Portfolios

  • Personal loans
  • Business loans
  • Auto refinancing
  • Patient solutions
  • Student loans

Accounts

  • Assetz Capital IFISA
  • Quick Access 4.1%
  • 30-Day Access 5.1%
  • 90-Day Access 5.75%
  • Property Secured 5.5%
  • Great British Business 6.25%
  • Manual Lending – Up to 15.5%

Best for

  • Small business
  • Real estate
  • Personal loans
  • Education loans
  • Medical solutions

Top 5 Peer-to-Peer Lending Sites in the US

Prosper

Prosper Logo

Prosper, the first peer-to-peer online lending platform in the US, is one of the largest lending companies with 14 Billion already borrowed.

Prosper offers a wide selection of loan types that include Debt Consolidation Loans, Home Improvement Loans, Short Term & Bridge Loans, Auto & Vehicle Loans, Small Business Loans, Baby & Adoption Loans, Engagement Ring Financing, Special Occasion Loans, Green Loans and military loans.

Loan amount ranges between 2000-40,000 with a loan term of 3-5 years. APR at Prosper personal loans ranges between 6.95% to 35.99%.

Pros

  • Wide selection of loans
  • Simple and quick process
  • No prepayment penalties
  • Stable and competitive yearly returns

Cons

  • Late payment fees
  • Strict requirement
  • Not available in every state

Portfolios

  • Personal loans
  • Business loans
  • Auto refinancing
  • Patient loans
  • Student solutions

Accounts

  • Late payment fees
  • Strict requirement
  • Not available in every state

Best for

  • Small business
  • Personal loans
  • Medical solutions
  • Real estate
  • Education loan
Lending Club

Lending Club Logo

Founded in 2007, Lending Club is one of the largest peer-to-peer networks in the US with 2.5 million customers and 44B borrowed as of 2019. The amount of loans offered by Lending Club varies based on the type of loan: Personal loans up to $40,000, Business loans up to $300,000 and medical loans up to $50,000.

The minimum investment at Lending Club starts at $1000 in a time period of 3-5 years and annual fee of 1%.

Pros

  • High returns
  • Low minimum requirement of $1000
  • Great third-party tools
  • No prepayment fees

Cons

  • Not available in every state in the US
  • Automated investment based on investor’s preferences.
  • An annual fee charge

Portfolios

  • Personal loans
  • Auto refinancing
  • Patient solutions
  • Business loans
  • Student loans

Accounts

  • Traditional IRA
  • Roth IRA
  • 401(k) Rollover
  • Joint Account
  • Trust Account
  • Corporate Account
  • Custodial Account

Best for

  • Small business
  • Education loans
  • Personal loans
  • Medical solutions
  • Real estate
Peerform

Peerform Logo

Peerform peer-to-peer network was created by Wall street executives in 2010 offering a marketplace for borrowers and investors in order to provide better rates than institutional banks. Peerform offers debt consolidations, credit card refinancing, home improvement, major purchase and car refinancing loans on a range of $4000-$25,000 in a term of 3-5 years.

The Peerform offers investors the Peerform loan analyser that uses an algorithm to achieve a better consumer credit risk.

Pros

  • Offers fixed rates
  • Unique loan platform for borrowers and investors – Peerform Loan Analyser
  • No prepayment fee

Cons

  • Low loans amount offered
  • Not available in all US states
  • Late fee amount of $15
  • No variety of investments accounts

Portfolios

  • Personal loans
  • Auto refinancing
  • Student loans
  • Patient solutions
  • Business loans

Best for

  • Education loans
  • Personal loans
  • Medical solutions
  • Small business
  • Real estate
Fundrise

Fundrise Logo

Fundrise provides a similar service to other peer-to-peer lenders with a focus on the real estate market. The crowdfunding company offers no accredited investors to invest in high quality real estate properties with relatively high returns and a safe investment strategy.

Fundrise offers two types of real estate investments: eReits and eFunds – There are seven eReits and three eFunds offered by Fundris, those inlcude the Income 1&2, Growth 1&2, East Coast, Heartland and West Coast eReirts and Washington D.C., Los Angeles and other major cities eFunds.

For conclusion, Fundrise can be a great solution for those who would like invest in real estate with low amount of capital and effort.

Pros
  • Minimum investment of $500-$1000
  • Provides the opportunity to enter high-quality real estate investment with a low amount of money
  • 90-day money back refund
  • Great investment platform
  • Dividend Reinvestment

Cons

  • Investments are not liquid until maturity
  • Offers only real estate investments
  • Can be a risky investment compared to other P2P lenders

Portfolios

  • Supplemental Income
  • Balanced Investing
  • Long-Term Growth
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Accounts

  • Personal Investment Account
  • Joint Account
  • Trust Account
  • Limited Liability companies
  • Limited Partnership
  • C Corporations
  • S Corporations

Best for

  • Real estate
  • Education loans
  • Small business
  • Personal loans
  • Medical solutions/li>
Upstart

Upstart Logo

Upstart was founded in 2012 by former Google employees as a peer-to-peer lending company providing borrowers with average credit score attractive loans and an impressive investing platform for investors. Upstart offers a wide selection of loans which range between 1000-50,000 with monthly repayment over 3-5 years. In addition, Upstart offers a good deal for startups and small businesses.

In conclusion, Upstart can be a good choice for those with an average credit score and small businesses looking for quick funding.

Pros

  • Automatic investing
  • No prepayment penalty
  • Offers loans to borrowers with average credit score(620), or those who new to credit
  • Wide selection of loans
  • Fixed rate

Cons

  • Charges a late fee of $15 or 5% of the unpaid amount
  • Not enough data for investors

Portfolios

  • Personal loans
  • Business loans
  • Auto refinancing
  • Patient solutions
  • Student loans

Accounts

  • Automatic investing
  • Self-Directed IRA

Best for

  • Small business
  • Education loans
  • Medical solutions
  • Personal loans
  • Real estate

How does P2P investing work?

Loans
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As we have already mentioned, P2P platforms bring together lenders and borrowers, thus creating an online lending market. Some of the most reliable platforms are Upstart, Funding Circle, SoFi, Lending Club, Peerform, Mintos, Bondora, etc. On these websites, both lenders and borrowers create profiles in order to search for the best opportunities. Borrowers state the amount of money they need, their credit score, debt-to-income ratio, etc. They usually can apply for business loans, personal loans or student loans. On the other hand, after reading a borrower’s profile, a lender decides if they want to lend them a part of their money or all of it. In most cases, there are more lenders who invest in one loan, which means that when the borrower returns the money, a part of the installment is returned to each of the lenders according to their share in the loan. For example, if a borrower needs $5,000, you can lend them $100. When the borrower starts paying back the money, a part of your $100 will be returned to you each month, plus the interest rate. Sounds good, right?

How do you earn through P2P investments?

Business / Analytics
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First of all, let us mention that there is definitely some risk involved in peer to peer loans. However, it is important to note that you can absolutely minimize the risk if you gain knowledge on this topic. And with practice, you will only get better and see how your return on investment grows. Also, some lending platforms offer a buy-back guarantee option. In case a borrower defaults, the platform buys back the loan and takes care of the legal procedures. That way, the lender faces much lower risk. On average, default rates in peer to peer lending industry vary from 1.5% to 10% for high-risk borrowers. It is important to note that the interest rates in P2P lending usually range anywhere from 5% to 36%. In addition, P2P platforms approve loans to many people who would not be eligible for a bank loan because of their bad credit score. Finally, due to the different business model and the lower maintenance expenses that these platforms have when compared to banks, it is obvious that the average return has to be higher than if you invested your money in the bank.

Profit / Bar Chart
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In fact, often you can get as much as 10% return on investment, if all works out. But if you want to be more “realistic”, you can expect to get around 7% return. After your investment is returned, you will be able to reinvest the money or withdraw it from your P2P lending account. But how does all this work for P2P platforms? Actually, it is rather simple. They charge fees to both borrowers and investors. For borrowers, this usually includes an upfront fee plus a small margin, which together often amount to 3-5%. When it comes to lenders, they are charged a fee which is already deducted from the interest rate they receive.

Types of P2P lending / P2P investing

There are four principal types of peer to peer investing: consumer loans, business loans, student loans and real estate loans. Whether you are an unaccredited or accredited investor, most of these P2P lending loan types can give you an excellent opportunity to make a profit.

Consumer loans

Consumer Loans / Ecommerce
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This type of P2P loans is definitely the most popular and the fastest-growing. In general, these are smaller loans which people use to pay for medical expenses, credit card consolidation, etc. Most people who take out such a loan have good credit scores and are very likely to pay the money back on time. Some of the best platforms that offer these loans are Lending Club, Prosper and Zopa.

Small business loans

Almost everyone who wants to start or further invest in their business needs a loan at some point. Recently, many business owners have opted for P2P loans, which they usually can get within a week. If you would like to invest in these P2P loans, you want to search platforms like Funding Circle and OnDeck.

Student loans

Student Loan Application
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Nowadays, a person’s level of education largely decides which road they are going to take. That is the reason why many young people are ready and willing to get into debt in order to pay for college. Students have two options ‒ to get a consolidation loan after graduation or a traditional student loan while in college. This is a great chance for investors even though yields are slightly lower for these loans. In addition, if you want to help someone pay for their education, this is the perfect loan for you. CommonBond and SoFi are the two leading platforms that specialize in student loans.

Real estate loans

Real Estate / For Sale
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The real estate loan market has long been dominated by banks and has created a huge amount of debt in the US. For this reason, people are increasingly turning to P2P lending platforms like EstateGuru, Realty Mogul, SoFi and others. These and similar P2P lending websites require much simpler and less time-consuming procedures compared to banks. Apart from mortgages, borrowers apply for bridge loans, construction loans and first trust deeds.

How to become a pro at P2P investing?

If you are a beginner in this industry, you should tread carefully and turn to someone who is experienced. You can also read online content about P2P lending as there are numerous blogs and websites that cover this topic. For all of you who are new to P2P investing or are thinking about venturing into it, we want to share a few success tips which can save you a lot of time, money and effort.

Diversify

Loan Diversification
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This point is first on the list for a reason. If you want to invest a certain amount of money in P2P lending, make sure you spread it to many different loans. There are different categories of loans, from low risk to high risk. The ones with low risk also have low interest rates and low returns. On the other hand, the risky ones provide higher interest rates and higher returns, but these borrowers are more likely to default. Therefore, you want to split your money to various borrowers. This will enable you to get a good average return and keep you motivated to invest in the long run. Loan diversification is the most important rule you should keep in mind while investing in P2P loans. Diversification can heavily reduce the risk that is involved in P2P lending.

Choose loans carefully

This point is a direct result of the previous one. If you want to spread your money wisely, you have to look at each loan individually and decide if you want to invest. Another option that you have is auto invest, which is offered by a number of P2P platforms. This feature enables you to automatically invest in many loans according to the filters that you have previously set on your profile. The auto invest feature will automatically diversify your P2P loan portfolio.

Go step by step

Investment / Business
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Don’t invest all of your money in one day. Rather, go slowly and be picky about the loans you invest in. If you find only one attractive loan a day, then invest only in it. Peer to peer lending is a growing market and if you are patient, you can definitely find lucrative investment opportunities on a regular basis. Moreover, for the start, make sure you invest a maximum of 1% of your total amount in one loan. This is much wiser than trying to invest as much money as you can right away. Check for new loans every few days and you may discover great new opportunities to invest in P2P loans.

Go for long-term loans

Longer-term loans are rather new in the P2P industry and they are not so frequent yet. However, if you invest in long-term loans, you can expect additional 2-3% in interest rates. It is very simple: platforms know it is riskier to invest in long-term loans. Therefore, they reward you for your willingness to risk by giving you better rates.

Reinvest interest payments

When your invested money starts coming back, you will be tempted to start withdrawing it. Don’t do that. If you want to make a substantial profit with peer loans in the long run, make sure that you always reinvest. This way, you will see your investment multiply at a much faster pace.

Pros and cons of P2P investing

Pro / Contra of P2P Lending
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Even though P2P investing is superior to bank loans in many aspects, we still want to list its advantages and disadvantages. This way, you will be able to weigh all aspects carefully and eventually decide whether investing in P2P lending is your cup of tea.

PROS

  • A lender can be an institution or an individual.
  • It is very simple to open an account on online lending platforms.
  • There is not as much paperwork as with bank loans.
  • You can decide who you want to lend money to and how much you want to invest.
  • It is possible to lend small amounts (as little as $25) to one borrower.
  • As the borrowers repay the loans, you receive monthly payments of the loan amount plus the interest rate.
  • You can split your money into many different loans.
  • It is up to you to decide if you want to reinvest or withdraw the money you have earned.
  • Average returns are higher than with bank loans.

CONS

  • P2P lending is rather new and has not yet proven how it can overcome a financial crisis.
  • You need to diversify and spread your money to loans with different levels of risk.
  • Your money is not as safe as if you invested it in a bank. However, more and more platforms start to guarantee to buy loans back in case of default (though, it’s questionable if this is even possible in case of a financial crisis).
  • You need to be patient. P2P lending is not a get-rich-overnight system and it takes time to see tangible results.

Conclusion

There you go. Now you know how P2P lending works and how to be successful at it. You need to be patient, careful and willing to risk a little. And if you persist, you may quickly see that it can largely outperform traditional investing in loans. It is up to you to decide whether you want to invest in this business. Our advice is that you carefully weigh all the pros and cons and start slowly. Then, after some time, when you see results, you can determine if P2P investing was the right choice. What do you think about P2P lending? Please let us know your thoughts in the comments below.

About the Author:

Igor Zagradanin

1 Comment

  1. Great piece of information over here. In my opinion, P2P lending can be a great opportunity if you’re looking for an innovative way to invest your money. As an investor in P2P loans, you can earn some passive income while diversifying investments and potentially lowering your overall risk.

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