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, a single default won’t take 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.
It’s also important to remember the maxim about high return and high risk going hand in hand.
“Investors who seek a greater return on their money from P2P platforms should make note that it only comes from the fact that they’re sharing their funds with riskier borrowers,” says Angelo DeCandia, professor of business at Touro University. “They have essentially taken on the risk that was formerly carried by banks and investment firms.”
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 four sites that make investing in peer-to-peer lending both easy and transparent:
— Best for impact investing: Kiva
— Best for automatic investing: Prosper
— Best for real estate investors: Fundrise
— Best for real estate P2P: Groundfloor
Best for Impact Investing: 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.
To get started, simply choose someone you want to support and decide how much you want to loan them. 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 2 million customers with over $28 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 5.3%. 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 to B weighted to D to HR weighted, so it’s easy to diversify.
Best for Real Estate Investors: Fundrise
If real estate is your investment flavor of choice, Fundrise may be right for you. While more of a real estate crowdfunding platform than a traditional P2P site, it’s a great way to invest in private market real estate typically only available to folks with deep pockets.
“Besides attractive returns and an easy-to-use platform, Fundrise offers nonaccredited investors the ability to buy, sell and manage commercial real estate — something that most could never do on their own,” DeCandia says. “And most importantly, the capital commitment is low enough so that anyone can participate.”
You can get started with as little as $10 and five minutes of your time. And once you’ve chosen your target portfolio, Fundrise will automatically add investments for you — no additional investment required. However, you are, of course, welcome to continue adding funds.
“Like all real estate investing, Fundrise requires a long-time approach and may not offer the liquidity that some investors are used to in the stock and bond markets,” DeCandia notes. Investors saw an average return of 2.3% after one year of investment and over 70% after nine years.
“If an easy-to-use, speculative investment is what you’re looking for, Fundrise just may be the thing you seek,” DeCandia says.
Best for Real Estate P2P: Groundfloor
If you want a true peer-to-peer real estate investment platform, Groundfloor may be a better fit. You can fund fix-and-flip loans with returns ranging from 7% to 26%. All loans are graded on a scale of A through G, with interest rates corresponding to degree of riskiness.
Groundfloor is one of the easiest platforms to get started on thanks to its Auto Investor Account, which automatically invests your deposits across all Groundfloor loans. Or, if you want a more customizable experience, you can create a portfolio tailored to your goals and risk tolerance.
The fees vary based on your chosen portfolio structure. For example, there are no fees for investor accounts where you purchase individual loans. But if you use the company’s Flywheel Portfolio, you’ll be charged a 0.5% fee when capital is repaid.
Anyone can invest, and U.S. investors need to make only a $10 deposit to start earning. Although, you need to invest at least $100 to use the Flywheel Portfolio. Interest will then accrue from the date of your initial investment until the loan is repaid.
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Best Peer-to-Peer Lending Websites for Investors originally appeared on usnews.com
Update 05/14/25: This story was published at an earlier date and has been updated with new information.
