>P2P Lending Is a Growing Trend
Peer to peer lending is a type of lending that matches investors with individual borrowers. It is a recent innovation. However, the peer to peer market is growing for quite some time because it fills at least two gaps that traditional lending sources have left. The market emerged for the first time in 2005 in the United Kingdom and a year later, arrived in the United States. Since its inception, it has been growing rapidly while traditional consumer bank loans and credit card lending have been declining.
Reasons to Try Peer to Peer Lending
Peer to peer lending emerged during a time when the traditional financial system was undergoing a crisis around the world. Some may call peer to peer a variant of crowdsourcing, but the popularity of these services has been increasing in all countries. These are the reasons why you should consider trying peer to peer lending –
After deducting losses, average net returns are lucrative, ranging from 15% to 20% per annum for most lenders on peer to peer lending platforms. These returns are highly competitive when you consider them against average returns that other market link investments like the stock market, real estate, and MFs deliver.
Create a Portfolio Based on Your Criteria
Investors usually invest in multiple instruments like SIPs, stocks, and MFs. When they invest in peer to peer lending, it adds diversification to his/her market-linked investment portfolio. You can attain the additional diversification in this loan segment by investing across borrower profiles – professions, risk-grades, geographies, and demographics. So, you can create an investment portfolio based on your criteria through peer to peer lending. As a result, you can spread your investment across borrowers in peer to peer forming a sort of hedge, irrespective of how small the investment amount is. It is similar to having the features of a large investment but for a smaller one. When it comes to small investors, peer to peer provides the best of both worlds.
What Are The Risks In P2P Lending
Although peer to peer lending has many benefits and thus, it is convenient for most individual borrowers and investors of today, it also has some risks. For example, it has low liquidity and no insurance. Cons also include shorter loan terms, potentially higher fees, and the possibility of more stringent loan payment terms, the potential need for collateral or cosigners, and reporting requirements. If you want to get into the peer to peer lending, then you must be cautious about these so you can avoid risks.
The Major Players in P2P Lending
The peer to peer lender began its journey in 2007. It offers four types of solutions to borrowers:
- Personal loans: Lending Club offers loans up to $40,000 that you can use for any of your personal agendas like paying off credit cards and clearing off debt.
- Business loans: The lender offers a business loan up to $300,000. The fixed term of one to five years remains without any prepayment penalties. To qualify to get the loan, you have to be in business for at least one year and have annual sales of at least $50,000. Moreover, you need to own at least 20% of the company and have good business credit.
- Patient solutions: The app offers patients a loan up to 50,000 to finance their medical bills. Patients can pay off all sorts of bills and surgeries with it.
- Auto refinancing: It also makes it possible for clients to go for an auto refinancing loan.
Another innovative peer to peer lending platform, Upstart was founded by three former Google employees. Along with the app, they also created a spontaneous software for financial institutions and banks. A unique feature of Upstart is that uses artificial intelligence for assessing the risk of the borrower. With this strategy by using technology, this lending platform has significantly lower loss rates than some of the peer companies. Upstart offers loans from $1000 up to $50,000 starting from a low rate of 8.85%. The terms are valid for three to five years and there is no prepayment penalty. Upstart uses AI to look for the borrower’s FICO score and credit history from the past years. It also considers borrower’s education and job history before determining creditworthiness. Unlike other peer to peer platforms, Upstart allows the users to set up a self-directed IRA using the investments from peer to peer lending. This unique feature is attractive to all investors.
A group of Wall Street executives with experiences in technology and finance founded this peer to peer platform in 2010. They wanted to offer a positive experience to their borrowers with a clear, fast and fair loan process. This app offers loans from $4000 up to $25000 at a fixed interest rate of 5.99%. There is also a one-time origination fee of 1% to 5% when the borrower receives the loan. Investors can choose between two types of products on Peerform, such as Whole loans and Fractional loans. They can also customize their investment with the customization options available on the platform to get the most diversified selection possible.
It is one of the oldest peer to peer lending platforms and the very first one in the US. Founded in 2005, Prosper claims to have coordinated more than $12 billion in loans to over 770,000 borrowers. The platform offers personal loans up to $40,000 to the borrowers with a fixed term of three to five years and a fixed-rate. You can pay off the loan early also without getting penalized. Moreover, you can get an immediate look at what the rate would be. Once the platform approves your loan, it transfers the money directly into your bank account. Investors can choose from many options on loans. Prosper offers seven distinct risk categories to select from. Each category has its own calculated returns and level of risk.
You can choose one of these apps according to your financial requirements.