Peer-to-Peer Lending: Passive Income for Investors
By: Andrew Cartwright
Tags: Investors, Investing, Loans, Income, Money

Photo by Micheile Henderson on Unsplash

Investors are always finding ways to generate more income. Peer-to-Peer Lending offers a unique way for investors to earn more income from their own money.

What is Peer-to-Peer (P2P) lending?

According to Forbes, “Peer to peer (P2P) lending firms match people or business looking to lend money (investors/savers) with those wanting to borrow. The companies aim to make a profit by charging a fee for facilitating the transaction.”

P2P websites promise to cut out the middle-man while also giving the investors a chance to earn more return on their money. You can earn income on returns as the borrower repays you. Investors can help students pay for loans, small business, to even home improvements.

These websites help investors collect 2% — 6% interest on their cash but also get to choose how much they want to invest in. The percentage can be higher than if you were to save your money in a savings account.

P2P lenders offer options in the types of risk that investors want to take on. However, there are potential risks. It’s not a savings account and there is potential to lose out on some of the money that you invest or borrow. The borrowers might be there because traditional banks declined their applications.

It’s important to check with P2P websites terms and conditions carefully before understanding how you’ll be protected before getting started.

Prosper

Prosper was the first lending company to launch in 2006. Borrowers must meet the criteria of having a minimum FICO score of 640.

Investors can open an account with as little as $25 dollars. “This way investors can build a portfolio of loans, taking just small fractions of each loan.” Investors get the chance to invest in portions of loans and this is appealing for those afraid of risk. Within 30–40 days and once all other investors submit their portion, you will start to see the payments in your account.

Prosper allows filtering through a variety of different loan options that specify how much time investors have to invest as well as the amount needed and the yield for that loan.

Lending Club

Lending Club is the top leader in P2P lending in the world. It has issued $50 billion in loans and connected more than 3 million borrowers with investors.

“They provide excellent returns for investors and they allow quick access to funds at competitive interest rates for borrowers.”

The requirements to join include having an annual gross income of at least $70,000. Borrowers first begin applying for a loan with a minimum of 660 FICO score. Investors can then choose to invest in a variety of different loans with a minimum investment of $25.

The borrowers go through verification levels and if the verification fails the loan will not be issued. If the borrower is passed then investors can expect to start seeing their money within 30 days once the payment has been dispersed.

Lending Club offers automated loan picking in their Portfolio Builder that gives investors three options in different grade loans.

Upstart

Upstart is newer than other Peer-to-Peer Lending organizations and they choose their borrowers differently than compared to other companies. They look at employability, earning potential, and education rather than just credit scores.

“Nearly 97% of borrowers from Upstart are college graduates and 71% of them select refinancing credit cards as the purpose of the loan.”

In order to become an investor with Upstart, you must have a net worth of $1 million.

Compared to Prosper and Lending Club they do not charge any investor fees and should a borrower default, Upstart will refund the origination fees to investors in the loan. And they don’t use a filtering system for investors to choose the loans they want to invest in to. The investor only has control over the risk grade, but besides that, it is completely automated.

Peerform

At Peerform, borrowers need to have a FICO score of 600 and have a debt to income ratio below 40%. Like LendingClub and Prosper, investors are given the option to search for a loan to invest in based on the interest rate, grade, amount, and purpose.

Peerform gives investors the option of choosing to invest in whole loans or fractional loans with a minimum of $25 dollars. Peerform uses methods rather than filters in order to better calculate consumer credit risk.

“Peerform marketplace platform offers the prospect of compelling risk-adjusted returns as well as steady monthly cash flow deposited straight into your account.”

Interest rates can vary between 5.99% up to 29.99% for the borrower and they won’t know until you apply. It also doesn’t change during the life of the loan.

SoFi

SoFi makes it very simple for beginner investors to get started. There’s no minimum amount to open an account to get started or to invest.

SoFi offers investors a team of certified financial planners and complimentary career coaching for new beginner investors. There is no account management fee for this either-or closing fees if you decide this isn’t for you.

Investors get to choose between two different types of accounts. One is an active investing account and the other a passive investment. Passive investments offer pre-built portfolios based on risk level and financial situation. The active investing account allows full control of buying and selling stocks and funds.

“SoFi clients have a choice of 10 portfolios based on risk tolerance and investment objectives, using a diversified selection of low-cost ETFs that give exposure to U.S. stocks, international stocks, real estate, high-yield and Treasury bonds, as well as to specific countries and regions.”

This automated system balances your account as it checks your portfolio so that it’s always on track.

Before deciding to choose Peer-to-Peer Lending it’s always important to do your research before investing in a firm and where your risk tolerance is at.