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Last Updated on: 14th January 2019, 11:43 am
After the financial crisis got rolling along like an unstoppable steamroller in 2007, consumers and small businesses discovered a shocking and even terrifying new reality. The happy-go-lucky, carefree lenders that had cheerfully splashed liquidity in the form of loans around the consumer and small business channels to the economy were no longer shopping around for customers to just hand out money. The banks and lending institutions found every type of barrier to extending credit that you can imagine, and quickly barred the proverbial doors to those businesses and individuals who needed funding the most. For a time, even well-qualified and rated borrowers had to pay double digit interest rates or choose to walk away hat in hand. This is what gave rise to the now burgeoning Peer to Peer Lending industry that has taken both the nation and the financial world by storm and by surprise.
What Are Peer to Peer Lenders?
Peer to Peer Lenders are those heroic and pioneering platforms, websites, and companies who came riding gallantly to the rescue of the entrapped business and consumer would-be borrowers. They are lending sites whose goals were to fill the void left by the still-reeling banks in order to issues loans to consumers and businesses, which were effectively made by ordinary investors instead of the traditional big (and even smaller community) banks. People loved the fact that they could come together on a website and help each other out with either funds to loan out for a better interest rate or money to borrow at a lower interest rate. The P2P's were the entities that facilitated this and made it possible to eliminate the stodgy middleman, the bank or other financial institution. Because of this simpler business model with no banks in the middle, the interest rates come in much lower than a borrower could otherwise hope to secure, while investors achieve greater returns than they are able to obtain in traditional methods of saving.
Who Are the Major Players in the Industry?
The two biggest players in game have traditionally been Lending Club and Prosper. They are no longer the only game in town, in particular when you consider that rival SoFi is now one of the very largest student loan and refinancing operations in the country, traditional or otherwise. Besides SoFi, other major operations in the P2P sphere include auto lender DriverUp, Daric, small business lender AbleLending, and sub-prime P2P lender Peerform.
How Peer to Peer Lending Works
Most of the major Peer to Peer's have minimum credit scores that a borrower must have in order to secure one of these kinds of loans. Both Lending Club and Prosper require 660 and 640 minimums respectively, while most of the other P2P outfits follow suite. Peerform breaks the mold and positions itself as the sub-prime Peer to Peer Lender, accepting a minimum 600 credit score. The various platforms then assign their own proprietary model of risk grade to the loan, based heavily in part on the credit score each individual brings to the table. Interest rates for those who qualify range from under 6% for the well-qualified borrowers on up to more than 30% for the least-qualified.
Loan amounts range from even $1,000 to $2,000 on up to $25,000-$35,000 with most of these P2P platforms. The repayment terms are typically either three years or five years. Borrowers will pay an origination fee of between 1% and 5% besides their interest rate, which will again depend mostly on the credit score they bring to the table.
Comparison of the Top 10 Peer to Peer Lenders
|Lending Tree||Lending Club||Prosper||SoFi||Daric||Peerform||Driver Up||Pave||Able Lending|
|Personal Loans Investments|
|Commercial Loans Investments|
|Equity Stake Investments|
|Minimum Credit Score||Varies||660||640||Varies||660||600||Varies||660||Varies|
|Cost for Investors||Varies||1 Percent Annually||1 Percent Annually||No Fee||No Fee||No Fee||Undisclosed Monthly Maintenance Fee||No Fee||No Fee|
|IRA Eligible Investment|
|BBB Rating||A-||A+||A+||A-||No Rating||A+||A+ Parent Company Sierra Auto Rating||No Rating||A+|
|Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review|
|URL||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site|
Which Investors Are These Peer to Peer Lending Companies Ideal For?
The answer is actually in a state of transformation as we publish this. In the past, only institutional and accredited investors who could demonstrate an income of at least $70,000 and a net worth of the same or only a net worth alone of in excess of $250,000 were able to participate in these investments. Some of the platforms enforced this more aggressively than others, who merely asked you to fill in a survey to state that you had these resources available to you. Since the passage of the JOBS Act Title IV provision at the end of October 2015, which is to be implemented in early 2016, non-accredited investors will be able to finally participate in these interesting investment opportunities for the first time. Thanks to the machinations of the SEC, there will still be guidelines only allowing a limited participation of around 10% of your annual income or assets.
Investors who are qualified and interested pay anywhere from no fees to a 1% per year management fee to participate. Any gains that you bank will be taxed as regular income, since this does not count as passive investment income. You can dodge that bullet by sheltering the money into an IRA account and then using this to invest in the Peer to Peer Loans with a minimum account size of $5,000. As far as the projected returns go, Lending Club and Prosper are boasting in the neighborhood of 7% to 10%, depending on the number of failed loans that you personally underwrite a portion of in your account.
What to Look for in Peer to Peer Lenders as An Investor
There are several good characteristics you should evaluate when you are considering with which one or more Peer to Peer Lenders to trust your hard-earned investment capital.
• Projected Returns – What projected returns amounts are the platforms suggesting you can expect to make? This needs to include a provision for failed loans, as no matter how good that you are at this, you will experience at least a percentage of these sooner or later, and probably sooner. The key is to diversify into between 100 and 300 notes, per the major P2P platforms' advice.
• Types of Loans – Some P2P's offer only unsecured personal loans, which obviously are riskier than those that allow you to invest in secured business or auto loans. Naturally the rates of hope-for returns are commiserate with the level of risk entailed.
• Cost to Investors – Several of the newer Peer to Peer Lending platforms are not charging investors anything, even when they manage the loan portfolio for you. Other more established outfits like the granddaddies of the industry platforms Lending Club and Prosper typically take a 1% management fee right off the top each year.
• Better Business Bureau Ratings – Most of the Peer to Peer Lending operations count an A or A+ BBB rating, though treat the ones that do not have a rating or profile on the BBB with more caution.
• Credit Score Profile of Borrowers – Remember that while most of the P2P's only accept 640 to 660 credit scores, Peerform works with those possessing 600 or higher, and several of the others do not necessarily enforce a certain minimum number, at all as with SoFi.
Peer to Peer Lending has opened up a whole new frontier for lending that is sophisticated and technologically advanced thanks to its almost- exclusively online presence. This brave new world offers lower interest rates, shorter approval and funding times, and more convenient and customer-friendly experiences than do the old guard banks. Investors are especially excited about the opportunities to make upwards of 7% to even 18% returns, depending on the company and platform and their particular loan book track record. It is important to keep in mind that investors who take on these investments are entering into highly illiquid positions from which it is difficult to exit before their maturity dates, although both Lending Club and Prosper offer fairly good secondary markets on which you can sell notes that you need to exit reasonably quickly.