As I have been looking around for ways to make money other than in the stock market I kept running into peer to peer lending, so I decided to dig in and try to find out if this would be a profitable endeavor. Peer to peer lending, or P2P, involves the individual lending and borrowing of money from one person to another outside of a traditional financial institution. Reasons for borrowing can include everything from paying for a wedding to consolidating debts, and is usually performed through an online lending firm. The lending models can include direct lending to an individual or to a pool of borrowers, and can be either unsecured or involve collateral.
I decided to take a look at some of the larger P2P sites to help me decide if I want to pursue this as a money making opportunity. The following is what I learned.
Prosper – There are several ways to invest with Prosper. Their automated plan allows investors to automatically bid on listings that match specific criteria. You can also diversify your risk by spreading smaller loan amounts across many borrowers. The minimum investment is $25.
Another option is to invest directly by viewing the loans that borrower’s request, which are unsecured, fixed rate loans with multiple terms. Borrowers are asked to describe the purpose of the loan, and their credit information is included to help you decide on a bid. You can also sort the listings by different variables such as time left, amount and loan category. There is a 1% annual loan servicing fee on direct P2P borrower loans.
You can buy notes (loans) from other lenders or sell yours using their trading platform operated by Folio Investing. They charge a 1% transaction fee for every note sale.
The blog reviews and comments about Prosper I read on the web ran at a two to one ratio of negative verses positive experiences. Most of the complaints from investors were of high loan defaults, while others claimed to have no problems at all with loan repayments. Prosper claims to have implemented a much more conservative risk management strategy which has led to a loan loss rate drop of 65% since the site’s 2009 relaunch.
Lending Club – Just a little newer than Prosper, Lending Club works basically the same way, minus the bidding. There is a service charge to investors of one percent of each payment received from the borrowers. They offer 3 or 5 year notes and claim that since 2007 investors have earned an average net annualized return of over 9.5%.
The reviews and comments that I read on the web about Lending Club were around three to one positive verses negative experiences, quite the opposite of what I found about Prosper. Most investors said they were making a return of from 9% to 11% and there was not much mention of loan defaults.
Loanio – Currently the site says “Loanio will not be accepting registration from lenders or borrowers, or approving new loan requests, until further notice. We appreciate your patience during this “quiet period” and hope to reopen for business as soon as possible.”
Kiva – If you are interested in using some of your money in a charitable way take a look at Kiva, which is a non-profit corporation that matches lenders with low-income entrepreneurs in various countries. The borrowers are considered at high risk of non-repayment and the loans made are philanthropic in nature with no offered rate of return.
So what are your thoughts on P2P lending? If you have tried it how did it go? As for me, I found out residents of my state are not allowed to invest in either Prosper or Lending Club, but if I could I think I would try Lending Club first.
Additional Reading:
What Financial Advice Would You Give to Future Generations?
Do You Give to Panhandlers?
Is It Tougher to Save Money or Make More?
I decided to take a look at some of the larger P2P sites to help me decide if I want to pursue this as a money making opportunity. The following is what I learned.
Prosper – There are several ways to invest with Prosper. Their automated plan allows investors to automatically bid on listings that match specific criteria. You can also diversify your risk by spreading smaller loan amounts across many borrowers. The minimum investment is $25.
Another option is to invest directly by viewing the loans that borrower’s request, which are unsecured, fixed rate loans with multiple terms. Borrowers are asked to describe the purpose of the loan, and their credit information is included to help you decide on a bid. You can also sort the listings by different variables such as time left, amount and loan category. There is a 1% annual loan servicing fee on direct P2P borrower loans.
You can buy notes (loans) from other lenders or sell yours using their trading platform operated by Folio Investing. They charge a 1% transaction fee for every note sale.
The blog reviews and comments about Prosper I read on the web ran at a two to one ratio of negative verses positive experiences. Most of the complaints from investors were of high loan defaults, while others claimed to have no problems at all with loan repayments. Prosper claims to have implemented a much more conservative risk management strategy which has led to a loan loss rate drop of 65% since the site’s 2009 relaunch.
Lending Club – Just a little newer than Prosper, Lending Club works basically the same way, minus the bidding. There is a service charge to investors of one percent of each payment received from the borrowers. They offer 3 or 5 year notes and claim that since 2007 investors have earned an average net annualized return of over 9.5%.
The reviews and comments that I read on the web about Lending Club were around three to one positive verses negative experiences, quite the opposite of what I found about Prosper. Most investors said they were making a return of from 9% to 11% and there was not much mention of loan defaults.
Loanio – Currently the site says “Loanio will not be accepting registration from lenders or borrowers, or approving new loan requests, until further notice. We appreciate your patience during this “quiet period” and hope to reopen for business as soon as possible.”
Kiva – If you are interested in using some of your money in a charitable way take a look at Kiva, which is a non-profit corporation that matches lenders with low-income entrepreneurs in various countries. The borrowers are considered at high risk of non-repayment and the loans made are philanthropic in nature with no offered rate of return.
So what are your thoughts on P2P lending? If you have tried it how did it go? As for me, I found out residents of my state are not allowed to invest in either Prosper or Lending Club, but if I could I think I would try Lending Club first.
Additional Reading:
What Financial Advice Would You Give to Future Generations?
Do You Give to Panhandlers?
Is It Tougher to Save Money or Make More?
I agree with Lending Club you get generally more positive feedback than with Prosper. Both are established players now and have a decent track record and are improving all the time. I can tell you from my own experience I am getting around 8% on the money I have had in Lending Club for 18 months now, and my IRA is a bit more aggressive and getting 12%. No complaints here. Good article.
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