The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.
Many investors are being drawn to investing in peer-to-peer loans as a passive investing method that provides higher than average returns. For conservative investors, the least risky notes on the lending platforms offer substantially better returns than bank certificates for slightly higher risk. For investors that are comfortable taking on more risk, the platforms also include notes with correspondingly higher risk profiles.
Peer to peer loan platforms categorize their loans into different investment grades based on the amount of risk inherent in the loan. Each peer-to-peer loan platform has a minimum credit score requirement for borrowers to reduce the risks of investing in loans on the platform. Loans requested by people with high credit scores receive higher investment grades than loans requested by people with average credit scores.
For many investors, the best thing about investing in peer-to-peer loans is how easy it is. In many cases, the minimum investment amount for a single peer-to-peer loan is around $25. Some investors use services that use proprietary algorithms to pick their notes for them. Others choose to use the reinvestment programs of the lending platform to reinvest their returns from the platform.
It is important for potential investors to remember that they will be holding on to their investments for a period of three to five years. Once money has been invested in a loan, the investor must keep the investment until the end of the term. The notes that the investors are investing in are unsecured, so if a borrower defaults on the loan, the investor could be out of a considerable amount of money. Many investors mitigate this risk by diversifying their holdings by investing small amounts into a large number of loans.
These peer-to-peer lending platforms are considered to be the best ones for investors due to their vigorous underwriting processes and returns for investors.
Lending Club
Lending Club is currently the largest of the P2P platforms, arranging about 56,600 loans totaling $791 million in the first quarter of 2014. Lending Club loans range from $1,000-$35,000 with the average loan amount reaching $13,913. The platform has some of the most stringent underwriting standards in the industry, with over 80 percent of applicants rejected for not meeting the criteria. To be approved, the applicant must have a FICO score higher than 660 and a debt-to-income ratio of not more than 30 percent.
Applicants that are approved are grouped into seven loan grades assigned a letter from A through G and further categorized into five sub-grades numbered 1 through 5 based on an assessment of their credit history. Applicants graded A1 get the lowest interest rates, currently 6.78 percent APR for 36-month notes and 7.3 percent for 60-month notes. G5 rated borrowers pay the highest interest rates, currently 29.99 percent APR for 36-month notes and 28.69 percent APR for 60-month notes.
Investors can also invest in Lending Club through private investment funds. There are two funds that are proving to be very popular for investing in Lending Club – the Conservative Consumer Credit Fund and the Broad Based Consumer Credit Fund. The Conservative Consumer Credit Fund has a minimum investment of $500,000 and invests in only the two least risky grade notes on the platform. Returns for the fund have averaged a 5.69 percent trailing 12-month net fund return. The Broad Based Consumer Credit Fund also has a minimum investment of $500,000, but it invests in all loan grades. The fund has invested in more than 16,000 36-month and 60-month consumers loans and returns for the fund have averaged a 9.36 percent trailing 12-month net fund return.
Prosper Marketplace
Launched in February 2006, Prosper was the first peer-to-peer lending company operating in the United States. Prosper is allowed to offer loans in 47 of the 50 states and in Washington, D.C. Investors must invest in a minimum of $25 per note, but any investment amount of at least $25 is allowed. Prosper has a Quick Invest feature that allows investors to choose the loan grade or other filtering criteria and invest with just four clicks.
Prosper offers loan terms ranging from 12 months to 60 months and allows borrowers with credit scores as low as 600 to use their platform. Prosper charges even higher rates than Lending Club for borrowers with lower credit scores, with interest rates ranging from a low of 5.65 percent up to a maximum of 31.99 percent. The average interest rate for loans on the site is 19.2 percent.
Peerform
Founded in 2010, Peerform is a newer peer-to-peer lending platform. Investors can invest in whole loans or fractional loans on the platform. Peerform offers personal loans with 3-year terms ranging from $1,000 to $25,000. Borrowers must have a minimum credit score of 600 and a debt-to-income ratio below 40 percent. They also cannot have any current delinquencies or judgments on their credit history.
Borrowers are sorted into 16 risk grades ranging from AAA to DDD. AAA graded borrowers have credit scores of 720 or above when they apply for their loan through Peerform. AAA graded borrowers are offered interest rates of about 6.4 percent while DDD graded borrowers pay an interest rate of about 24.2 percent.
Additional Resources For Investors
- Interest Radar – www.interestradar.com – Analytical tools for peer-to-peer loan investors
- Lend Academy Investments – www.lendacademy.com – Introduction to investing in peer-to-peer loans by Peter Renton
- LendingRobot – www.lendingrobot.com – Automated investment tool for peer-to-peer loan investors
- Nickel Steamroller – www.nickelsteamroller.com – Risk management tools for peer-to-peer loan investors
How about you all? Do you have any experiences with peer-to-peer loans? Do you have any resources not listed above that have worked well for you in the past?
Share your experiences by commenting below!
**Photo courtesy http://pixabay.com/en/executive-businesswoman-world-510513/
