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 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.
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“Engaging in peer-to-peer loans can provide a way to invest in creating opportunities for other people, while also providing intrinsic benefits for lenders,” says Kathy Guis, executive vice president for investments at lending nonprofit Kiva. “We have seen educators use peer lending to teach students about the interconnection of global challenges.” She gives the example of Dave Smith, a seventh grade social studies teacher, who created a student-fueled $1 million lending project through Kiva that dispersed nearly 43,000 loans worldwide.
Investors should beware 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, Guis says. She recommends seeking answers to the following questions:
— What is the risk of investing for the lender?
— Are there penalties, unclear policies or fees for loan transactions?
— What are the loan terms 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 provide clear information on loan terms or borrower protections through their website or when requested, consider moving on to a different organization,” Guis says.
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.
Here are five sites that make investing in peer-to-peer lending both easy and transparent:
— Best for starting small: Kiva
— Best for automatic investing: Prosper
— Best for real estate investors: RealtyMogul
— Best for accredited investors: Upstart and Funding Circle
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 carefully vets loans and partners to ensure mission alignment, and that borrowers receive high-quality services that unlock opportunities to help them better their lives,” Guis says.
You can lend as little as $25. Every dollar loaned on Kiva goes to funding loans, with about a 96% repayment rate — though Guis points out that financial return isn’t the primary goal for Kiva lenders. She notes that lenders are repaid over time to their Kiva accounts, allowing them to re-lend the same amount to other borrowers and “multiply the impact of their contribution.”
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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 helped more than 1.7 million customers with over $20 billion invested. 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 5.5%. 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 Real Estate Investors: RealtyMogul
If real estate is your investment flavor of choice, RealtyMogul may be right for you. The platform facilitates real estate investment trusts (REITs), private placement and 1031 exchange property investments. More than $1 billion has been invested through the platform since its inception over a decade ago.
Deals are vetted by the site’s affiliated broker-dealer, RM Securities, before being made available to investors. This includes a thorough review of the real estate company, property, investment plan and legal documents. The process has paid off for investors, who have realized an overall internal rate of return of 18.3%.
Best for Accredited Investors: Upstart and Funding Circle
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 12.4%, 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 the next business day.
To invest in peer-to-peer lending with Upstart, you need to be an accredited investor, which the Securities and Exchange Commission defines as someone with net worth of more than $1 million or income over $200,000 ($300,000 with a spouse or partner).
Funding Circle
If you want to support small businesses, consider peer-to-peer lending through Funding Circle Holdings (LSE:FCH). While the platform is only available to accredited and institutional investors, it’s doing impressive work. To date, it has helped provide more than $20.2 billion for more than 135,000 small businesses.
Investors buy notes with terms up to five years and receive monthly installments. To start, you need to transfer at least $25,000 to your Funding Circle investment account. You can then allocate that $25,000 in as little as $500 increments to fractional notes. Pick your own notes or let the platform’s auto invest tool choose for you.
Note there’s a 1% servicing fee. The company is also listed on the London Stock Exchange with ticker FCH.
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Best Peer-to-Peer Lending Websites for Investors originally appeared on usnews.com
Update 07/15/24: This story was previously published at an earlier date and has been updated with new information.
