My content is reader-supported by awesome people like you. Which means I could earn a commission. Learn more here!
In the past year, there has been a lot of buzz on how peer-to-peer (P2P) lending is one of the best alternative ways to invest.
This method especially works if you are leery of the current stock market.
Those who suppose P2P lending say that it’s a better way to get a good return on investment without getting deeper into a failing economy.
Before you decide to place a stake in your index funds and head out for the nearest peer-to-peer lending site, you should take a closer look at the basics and study the two main sites for P2P investing.
What is Peer-To-Peer Lending
At its core, peer-to-peer lending is when one person loans money to another person to start a new business or even when you borrow from a friend to pay a down payment on a new car.
You are either creating or taking the loan based on a relationship with the other person, which counts as much as a good credit rating.
Sometimes these loans to friends, family members or other individuals work out well, but in some cases, they do not.
Peer-to-peer lending has funded many dreams, but they are also famous for breaking apart personal relationships.
However, modern peer-to-pending lending hooks in with online investing. It’s actually a major business.
Third-party websites allow matching between lenders and borrowers without the trouble of personal ties. These websites intend to make it an easy transaction for both parties that can be trusted.
There are two things to consider with peer-to-peer lending.
– Borrowers on P2P lending sites typically get better interest rates and fairer loan terms than if they got a loan from a commercial bank.
Lending sites only work with borrowers if a credit score is above fair or over 630. The terms are still better than what you are offered at most banks and private investment firms.
– Lenders often get to know something about the borrower before lending out any funds, which builds more trust in the relationship. If the loan doesn’t work out and investors lose money on the deal, it’s not as personal as lending to a family member.
You won’t have to see your aunt at Thanksgiving and ask for the deposit on the hair salon back.
There are also guidelines and rules in place to minimize the risk so that you can get your investment back on loans that go sour.
What Sites Offer Peer-to-Peer Lending
There are many of these third-party P2P lending sites, but only two of them have been around long enough to have a viable, trustworthy model.
– Prosper.com
– LendingClub.com
Tips for Prosper
Prosper is one of the older peer-to-peer lending sites on the web. While they may not have always been successful, they have built an original model and created an incredible avenue for investors and borrowers to fund projects and businesses.
They also have achieved record highs in issuing loans from 2013 to 2014. This success did come after mistakes were made in 2012, but they placed $20 million in funding and saw incredible growth to correct those mishaps.
If you are just getting started with peer-to-peer lending, Prosper is very easy-to-use whether you are a borrower or lender.
The overall platform is based around its user experience. You will easily be able to set up an account, view your account summary, invest or borrow money with just a few clicks.
In addition, tools like Automated Quick Invest allow you to lend passively. You set up filters to auto-invest and let the website work out the rest.
If you are a borrower, Prosper has a lower credit score requirement of 640 to get a loan.
However, this also means that some lenders may come in contact with riskier borrowers.
Prosper actually allows for some loans to have an interest higher than 30 percent, which is nearly five percentage points higher than those you will find on Lending Club.
Overall, if you want to jump into peer-to-peer lending and want a simple answer, Prosper is the best platform.
This site has more filters allowing you to pick and choose borrowers as an investor. Borrowers will enjoy the simplicity of applying for loans and finding investors as well.
Tips for Lending Club
Lending Club has done very well throughout its history in peer-to-peer lending. If you view the issued loans history for the site, Lending Club experienced incredible growth throughout 2013 and 2014.
In addition, the site was the second after Prosper to launch and has experienced great returns. In November 2012, Lending Club had issued $1 billion in loans and doubled that amount in issued loans eight months later.
For its success, Lending Club has some minor drawbacks. The process to find borrowers or investors is not as simple as it is with Prosper. The website definitely needs a reinvention.
Lending Club doesn’t have as many filters as Prosper, which makes it less simple to find investors or borrowers. The site mainly focuses on institutional partners and doesn’t have enough options for retail investors.
This means that private investors won’t be able to use Lending Club as easily as Prosper for passive lending.
However, Lending Club has a better track record for strict loan requirements, which diminishes the risk for investors.
A minimum credit score of 660 is required to borrow money on the site. There is also a stricter application process, which means that 90 percent of loans are not approved.
However, the loans are better quality as well. The interest rates are lower, and investors are happier because they aren’t receiving a lot of default loans.
Overall, if you want to lower your number of default loans, then it’s better to go with Lending Club.
If you are a borrower with a good credit score and history, then you may enjoy the loan terms that you find from investors on Lending Club as they won’t have higher interest rates.
Ready to check out Lending Club?
Verdict: What Site to Use for Peer-To-Peer Lending
For those borrowers and investors who think online P2P lending is the next thing, Lending Club and Prosper will be the best to start with.
They both have a longer company history than any other peer-to-peer lending site, and they also have several tools to use that will make investing online very simple to understand.
Both platforms work wonderfully if you are looking to increase your portfolio or if you are a borrower trying to start a small business.
One way to decide on a platform is to just to open an account on Lending Club or Prosper to get a feel for how it works. There is no risk to open an account and get your feet wet.
It’s the next step to diversifying your investments or ensuring the success of your small business.
In Conclusion:
Peer to peer lending is pretty new to me, I happen to stumble upon it because of the fact you can invest your own funds into people’s loans and thought this overall was a pretty sweet concept. Â
I think the rates are great and so are the terms, so it’s really work checking it out.
