When fixed income just doesn’t cut it, some investors turn to peer-to-peer lending platforms for above-market returns. Peer-to-peer lending platforms have grown from a few startups in 2014 into a multibillion-dollar industry, with some analysts estimating it’ll be worth more than $804 billion by 2030.
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Peer-to-peer lending has three competitive advantages: First, the platforms’ proprietary credit evaluation algorithms can look beyond FICO scores to determine a borrower’s creditworthiness, enabling more people and businesses to get funding. Second, by cutting out the bank middleman, peer-to-peer lending allows investors to pocket more of the interest paid by borrowers. Third, peer-to-peer lending can provide other benefits, such as the feel-good benefit of knowing your money is helping another person or small business thrive.
“Engaging in peer-to-peer loans provides a way to invest in creating opportunities for other people, especially when done so through a nonprofit,” says Chad Sterbenz, chief investment officer at peer-to-peer lending site Kiva. “It can also be a great teaching tool to learn more about different businesses, farming techniques and climate mitigation practices around the world. I know some Kiva members who even use it as a tool to teach their children about lending.”
Investors should beware, however, that as with all investments, peer-to-peer lending comes with risk. Many sites encourage investors to diversify their risk by spreading investment dollars across multiple borrowers. This way, you’re less at risk of a single default taking out your entire investment. And never loan money you can’t afford to lose.
How to Choose a Peer-to-Peer Lending Platform
Before investing in peer-to-peer lending, perform the same due diligence as you would with any investment. You’ll want to understand the protections in place for both borrowers and lenders, Sterbenz says.
He recommends getting answers to the following questions:
— How does the lending platform protect borrowers and lenders?
— Are there penalties, unclear policies or fees for loan transactions?
— What are the interest rates for borrowers?
— Will this investment have a positive impact on the borrower?
— Will it achieve the goals of both the lender and the borrower?
If the platform “doesn’t feature loan information, borrower protections and other details on their site, consider moving on to a different organization,” Sterbenz says.
[READ: 7 Best Funds for Retirement.]
Best Peer-to-Peer Lending Sites
There are many peer-to-peer lending sites to choose from, but not all of them make investing easy or open to the general public. Sites like Funding Circle only allow institutional investors to lend. Others don’t post their lender requirements but simply direct interested parties to the company’s sales team for more information.
Three sites that make investing in peer-to-peer lending both easy and transparent are Kiva, Prosper and Upstart.
Best for starting small: Kiva
“Kiva is no ordinary peer-to-peer lending platform,” says Brian Martucci, personal finance expert at the financial website Money Crashers. “It’s built for a higher purpose, with lending activities focused on individual entrepreneurs and microbusinesses in low- and middle-income countries.”
Founded in 2005, the international nonprofit connects investors with microentrepreneurs and small business owners around the world. The company was founded on the mission to expand financial access to help underserved communities thrive.
“Kiva only posts loans we have vetted for the highest impact — loans that can improve lives and open opportunities,” Sterbenz says.
You can lend as little as $5. Every dollar loaned on Kiva goes to funding loans, with about a 96% repayment rate — although Sterbenz points out that financial return isn’t the primary goal for Kiva lenders. He notes that lenders are repaid over time to their Kiva accounts, allowing them to re-lend the same amount to other borrowers and “maximize the impact of their contribution.”
Best for automatic investing: Prosper
Also founded in 2005, Prosper was the first peer-to-peer lending site in the U.S. Since then, it has given more than 1.4 million borrowers $23 billion in loan funding. Investors can be a part of that funding for as little as $25.
Loans range from AA to HR for “higher risk, higher return.” Historically, interest rates on loans that originated since July 1, 2009, have averaged 5.7%. Investors pay a loan servicing fee of 1% per year for each payment received from a borrower.
The company’s auto invest tool lets you create a portfolio based on the rating mix you prefer, from AA-B weighted to D-HR weighted, so it’s easy to diversify.
Best for accredited investors: Upstart
Powered by artificial intelligence, Upstart is one of the most popular peer-to-peer lending sites for borrowers and investors alike. Through the Upstart Referral Network, the platform’s algorithm will refer borrowers to you who match your criteria through the company’s website. You can refine your borrower pool based on 15 criteria, from minimum credit score to loan size, geography and more.
The company boasts a gross average return of 11.2%, which is the annual percentage rate, or APR, less the expected annualized loss rate. The vast majority of loans are fully automated, meaning no human involvement is required. When the borrower accepts your offer, funding can be provided as soon as next-day.
To invest in peer-to-peer lending with Upstart, you need to be an accredited investor, which the SEC defines as someone with net worth of more than $1 million or income over $200,000 ($300,000 with spouse or partner).
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Best Peer-to-Peer Lending Websites for Investors originally appeared on usnews.com
Update 07/17/23: This story was previously published at an earlier date and has been updated with new information.
