Traditionally, if someone wants to borrow money for a project, they create a business plan, head for their local lender, then hope for the best.
Technology has drastically altered the playing field, introducing Peer to Peer lending, typically called P2P.
Using P2P, borrowers, via third-party interfaces, have access to countless investors actively searching for places to invest their money. These types of loans work faster and easier than traditional lending.
P2P has quite simply, come of age and taken off in a big way. Investors looking for a fixed return, low-risk investment, have flocked to these platforms. The loans are less volatile than the markets, offer a more stable income, plus allow both investors and borrowers greater access to each other.
FACT: Based on current interest rates and the government bonds offering low yields, often in the negative category, P2P investing is an excellent means to diversify holdings and maximize fixed returns.
In this article, we’ll take an in-depth look at four of the more popular platforms. Hopefully, this will allow both borrowers and lenders greater insight into which platform best satisfies their needs.
Lending Club might be called the Coca-Cola of the industry. Opening their doors in 2007, they currently have over $20 billion in loans. They service both consumer loans plus small to medium enterprise loans for terms of 36 to 60 months.
Lending Club shot up like a rocket garnering a 45% market share. In 2014 they raised over $900 million in its initial IPO, which later fell 72%.
SCANDAL: While not indicative of the entire company, founder Renaud Laplanche was recently forced to resign after internal audits found millions of dollars unfairly allocated and preferences given in lending decisions. He was forced to resign while the company attempts to rebuild.
Lending Club, and in particular those who participate, are protected in spite of the scandal. They are well capitalized, and in the event of bankruptcy, a secondary source of money will be used to cover outstanding loans.
The idea behind Lending Club is both brilliant and simple. They operate as an intermediate, holding loans in escrow until all paperwork is finalized and approved. At that time, the money is released to the borrower via partner banks.
Loan Amount: Lending Club issues loans of $1,000 to $35,000 for consumers and $15,000 to $300,000 for business entities
Lending Club has done their homework and understands the value of what they offer, garnering fees from both sides of the equation. Investors must invest a minimum of $1,000 to participate, and fees are as follows:
Investors are assessed a fee equaling 1% of the
Loan amount, based on the borrower’s repayment schedule within 15 days of the due date. Borrowers pay a loan origination fee ranging from 1% to 5%, which is determined based on the grade of the loan. Grades are determined by multiple factors including credit scores and proprietary formulas.
CAUTION: While Lending Club is an excellent company, they do protect themselves, as they should, if a loan should default. In that case, the investor is charged 18% on uncollected amounts. Should there be litigation involved, they are assessed their share of fees incurred.
Prosper, while not the largest, was the first to begin the P2P platform in the US, opening the platform to investors in 2006. They currently have around $6 Billion in loans to approximately two million customers. Their focus is on unsecured consumer loans.
Prosper offers a similar platform as Lending Club, with offerings between $2,000 to $35,000 with terms of 36 or 60 months. They operate on the notary business model, which means they act as the middleman.
Prosper allows the smaller investor, with a minimum of only $25 to participate in the program or test the waters. They are charged a 1% annual fee on outstanding investments. Borrowers, depending on the grade of the loan are charged a closing fee between 0.5 and 5 percent.
GRADE OF LOAN: Loans are graded based on proprietary internal formulas, which assign a rating called the “Prosper Score” to the loan. The specifics fo the score is not available; it is through debt-to-income and other checks. This is then combined with the borrower’s credit score to reach the final prosper score. Should a loan default, they are bundled and sold to third-party debt collectors. Investors then receive a portion of the proceeds.
Both Lending Club and Prosper are the major players in the industry and the only ones open to retail investors. There are other P2P platforms, listed below. However, they are available only to accredited investors.
Upstart began life in 2014, funded initially by a group of former Google employees. They currently have 300 million in loans.
Upstart must be doing something right as they have the highest, across the board success rate in the P2P industry, currently standing at 94%. This could be based on the way they measure whether a loan should be made, looking not only at the credit score but also the educational background.
Beyond their educational background, Upstart has a target niche where they found success, young professionals who are mostly college graduates. They offer loans for 3 to 5 years in an amount ranging from $3,000 to $35,000. Interest on these loans varies from 4 to 26 percent, depending on the grade of the person(s) involved.
FACT: Upstart utilizes a modeling system that has proven extremely accurate at predicting defaults and returns.
The Upstart Business Model
Upstart is a unique P2P platform, having a vested interest in each loan. They do not charge investors a fee, rather making their money on the loan origination fee. Should a loan default, the investors are repaid and the company itself loses.
Another difference is how investors determine which loan to be part of. In other P2P platforms, they can say yes or no to any particular loan, essentially picking only the best ones to be involved with. With Upstart, they do not have this option, instead choosing loans of a particular grade or criteria. Investors can begin the journey with only $100.
Funding Circle was originally a UK only company but spread its wings to America in 2013. They only make business loans and has chosen to only operate in the US, UK, Germany, and the Netherlands.
That hasn’t limited their outreach with loans of over $3 billion to date. Their loans range from $25,000 to $500,000 in the U.S. Interests rates, which are dependant on the grade, ranging from 5.5% to 27.8%.
This one is for the big boys, with a minimum investment of $50,000. Investors are then charged a monthly 1% service fee assessed on payments received that month.
Ready to Get Started?
If you’re ready to begin the journey of P2P lending, here is our advice on the best path to follow. Like anything we recommended here (or any of our posts), please perform your due diligence.
Diversification is one of the primary reason to seek alternative investments, and with that thought, we recommend investing in both Lending Club and Prosper. While Lending Club offers higher returns, Prosper has the best record for defaults across all classes of loans.
By investing in both, you are not only diversifying to the P2P platform, but spreading the risk across two of the front-runners.