Peer lending is taking off as a new way to borrow or invest online. Check out the free What is Peer Lending video for all your questions
I thought I would try out my video-making skills and couldn’t think of a better question to answer than, “What is Peer Lending?” The revolution in online loans is changing the way people invest and borrow money but there are a lot of misconceptions. While it’s been in other countries for longer, peer lending is still taking shape in the United States.
I put together the free video below to help answer questions about peer lending in general but also put together one on investing in peer loans. Rates on bonds and other fixed-income investments barely pay enough to cover inflation. Investing in peer loans is a great bridge between higher returns of stocks and lower risk in bonds.
In this video, we'll talk about how peer lending is just like a traditional loan and how you can borrow fro personal needs or for your business.
What is Peer Lending?
P2P lending is still a relatively new idea and I get the “What is Peer Lending?” questions on a regular basis. Peer lending is really just traditional bank loans except through an online platform. Borrowers fill out an application on Prosper or Lending Club that is reviewed and pay back their loan at an interest rate that depends on their credit score and financial history. Most peer lending platforms are offering personal loans of up to $35,000 at rates as low as 6% for good credit borrowers.
Peer lending has become a great asset class for investors because instead of the bank or a broker taking a cut of the return, investors are able to directly invest in individual peer loans. After a loan application is verified by the website, it goes live on the platform for investors to see. You decide if you want to invest and how much in each loan. The platform collects the monthly payments and passes them on to investors.
One of the first posts on the site was an interview with a peer lending investor in California that made over $10,000 in peer loans and an annual return of 14% over the last year.
Peer Lending is Becoming THE way to get a loan
Peer lending has been growing faster than anyone thought possible. By the end of 2012, less than $2 billion in loans had been made through the Prosper and Lending Club platforms, the two largest peer lending platforms. The total loan amount jumped to $4 billion by the end of 2013 and increased 150% to 10 billion by the end of last year. And that’s just from two websites!
The reason peer lending is growing so quickly is because regular banks aren’t lending! New financial regulations and loan costs are forcing banks out of small business loans. It costs just as much for a bank to write a large million dollar business loan as it does a small one, so there’s no profit incentive to make small business loans.
For personal loans, the banks are still shell-shocked from the financial crisis and have yet to relax borrower requirements. I talked about some of these financial regulations and the end of traditional bank lending in a prior post.
Among the largest peer lending sites are Lending Club, Prosper and OnDeck Capital but there are hundreds of others. We’ll talk more about getting a loan and specific sites in the next video.
While a few peer lending sites have become public names, knowing which can offer the best features for your loan will help you get the best rate. Check out this list of the best peer to peer lending sites to find your best rate.
What are the Pros and Cons of Peer Lending
There are some pros and cons for both borrowers and investors in peer lending. Most of the cons are those you find with any type of debt.
Just as with other loans, interest rates on peer lending can be expensive for borrowers with bad credit. Many peer lenders will not grant loans to people with a credit score below 620 and rates can be as high as 30% for some borrowers. Even the higher rates on some peer loans are usually well under those rates available on bad credit loans websites.
Your peer loan will be reported on your credit report and will affect your score. This can be a positive if you make regular payments. One of the most popular uses of peer loans has been for Loan Consolidation, paying off high-interest credit card loans. Because peer loans go on your credit report as non-revolving debt (debt that gets paid off with fixed payments) it is better for your credit score than revolving debt like credit cards.
The biggest benefit to peer loans for borrowers is that they are relatively easy to get and can take just a few days. Investor demand is so strong that peer loans are being funded in less than a day and most will pay out within a week. For small business owners, this means getting the money you need for expenses quickly and not missing out on sales by waiting months for a traditional bank loan.
The benefit to investors is that peer loans offer rates of return from 5% all the way up to 15% and higher. They can be relatively safe investments especially compared to small cap stocks or bonds of junk-rated companies. Most peer lending borrowers have pretty good credit ratings and you can pick and choose in which loans you invest.
I hope I’ve answered your What is Peer Lending questions but feel free to email or use the comments below to ask any other questions. Peer lending is quickly becoming a mainstream way to get money and p2p investing is helping investors meet their financial goals.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.