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I am always on the hunt to make some extra cash and diversify my portfolio as I don't want all of my eggs (aka forms of income) in one basket per se. So I've been researching different options for investing and did some research on peer-to-peer lending.
What is Peer-To-Peer Lending?
According to Wikipedia, peer-to-peer lending, also called P2P lending, is the practice of lending money through online services to individuals or businesses. The online services match lenders with borrowers.
Since P2P lending companies operate online, they can run their businesses with lower overhead costs. As a result, borrowers can borrow money at lower interest rates and lenders can earn higher returns compared to savings accounts and investment products offered by traditional financial institutions, such as banks and credit unions. There is a risk of the borrower defaulting on the peer-to-peer loan, so keep this in mind when investing.
Peer-To-Peering Lending is a fairly new term to me, so I took it upon myself to ask my more financial savvy friends over at the FinCon Community on Facebook their opinion on it.
Does anyone recommend (or condemn) investing in peer-to-peer lending?
And here's just some of the responses I received (both for and against).
Vicki Cook, the co-founder of Women Who Money, shared a popular post on her site with the pros and cons of P2P lending.
Nick Loper from Side Hustle Nation replied, “I had decent success (low double digit returns) with Prosper for several years, but the performance is way down recently (could be my strategy of buying the riskiest possible notes in search of big returns!). I’ve been drawing down my account as notes mature for other cash flow investments.”
Sandy Smith, founder of Yes, I Am Cheap, said she's done peer-to-peer lending for 5/6 years with an average return of 10%. She has a high risk tolerance and a small amount invested so is okay with peer-to-peer lending.
Josh Overmyer had a different opinion: “Count me in the condemn camp: they're basically junkier junk bonds, and not collateralized, so you can literally lose your entire investment if someone decides to stop paying (and that's happened on over 20% of my notes).” Read about Josh's P2P lending results on his blog.
Best Peer-To-Peer Lending Sites
After reading everyone's comments, I decided I was going to give peer-to-peer lending a try by investing a small amount. A google search for the best peer to peer to lending sites led me to Money Under 30. While I'm definitely not under 30 anymore, I like to think and act like I am sometimes (I've been 29 for several years now).
Prosper is the number one on the list of best P2P lending sites. There were the very first peer-to-peer lending marketplace in the United States, founded in 2005. According their website, they've lent out over $14 billion in loans to almost one million people.
I was familiar with Prosper as my daughter had multiple health problems that resulted in abundant medical bills. One of her doctors actually had brochures for Prosper in their office offering 12 months with 0% interest, so I helped my daughter apply to pay off her medical bills to avoid collection and higher interest rates. The process was seamless and we paid off the loan within 12 months to avoid interest. I'm not sure how the lender made any money on us, but… anyway.
The minimum investment for a lender with Prosper is only $25, and you have many risk options to choose from. Here are the current risk categories and the estimated returns:
- AA (lower risk) – 5.41%
- A – 6.03%
- B – 9.19%
- C – 11.12%
- D – 12.47%
- E – 11.91%
- HR (high risk) – 14.12%
Prosper says that nearly 84% of their investors met or exceeded their expected return on their investment. The borrowers that are being lent to also have above average FICO scores and average annual income.
That was enough to sell me. So I set out to invest in Prosper, put in my zipcode, and it said Prosper wasn't available in my area! Does my zip code really matter if everything is online based?
Prosper may have put a sour taste in my mouth for not accepting my zip code, but that didn't stop me from checking out the number two P2P lender on the list.
LendingClub is similar to Prosper but got started two years later than Prosper in 2007.
Lending Club is the world’s largest marketplace connecting borrowers and investors, where consumers lower the cost of their credit and enjoy a better experience than traditional bank lending, and investors earn attractive risk-adjusted returns.
The minimum investment is $25, but you still need to transfer a minimum of $1000 into your account. If you don't want to pick loans manually, they have an automated solution you can use to become diversified easily.
Prosper and Lending Club are the most notorious peer-to-peer lenders available, but there are more peer-to-peer lenders that can be considered:
- FundingCircle – this is for small businesses
- Kiva – this is non-profit based so you won't earn interest, but you'll feel good helping those less fortunate.
- StreetShares – this is also for small businesses
What's your take on peer-to-peer lending? Yay or nay?