Peer-to-peer lending , or P2P for short, was established in the early 2000s as a form of social lending that connects investors with small businesses or individuals directly. For many investors, it’s a popular alternative to traditional lending options because it often results in above-market returns. That said, P2P lending does come with its share of risks. Before you invest, here’s what you need to know.
What Is Peer-to-Peer Lending?
P2P lending is a form of financing that allows consumers or small businesses to get unsecured loans from investors without the need for a middleman or traditional financial institution. It is sometimes referred to as social lending, crowdlending or peer-to-peer investing.
With P2P lending , individual investors use a P2P lending platform or site to fund full or partial consumer loans with an expected return on their investment. The platform establishes the terms and rates of the loans in advance. Usually, these rates are more favorable for both the investor and the borrower than more traditional lending methods.
People who need money but won’t qualify for a credit card or loan through a traditional bank or credit union ?- or they just want a better rate ?- often choose a P2P lending site instead. The platform usually handles everything from underwriting the loan to distributing the funds and collecting payments. This makes the entire lending and borrowing process easier for all parties involved.
P2P lenders often consider factors like the borrower ‘s income, debt-to-income ratio , credit score and credit history to determine the loan terms and rates. On the investor side, P2P platforms provide a great way of diversifying their portfolio for a potentially higher return than other high-yield investments.
What Should You Look for in a Peer-to-Peer Lending Site ?
Since its inception, many new peer-to-peer lending sites have cropped up to provide payday loans in Arkansas locations an alternative method of financing that has proven to be quite profitable for investors and borrowers . However, with so many sites out there, it’s become difficult to sift through the competition and find the best platform to invest in.
- Loan minimums and maximums: Many platforms have a set minimum loan amount , such as $1,000 or $4,000. They may also put a cap on the loan, which could limit the investor’s earning potential.
- Full or partial investment: Some platforms allow investors to fund partial loans, often called “notes,” while others require them to fund the entire loan.
- Default rate: According to a 2018 survey, the average default rate on P2P loans was 4.52%. Some platforms have a lower or higher default rate.
- Qualifications of borrowers : Some platforms have minimal requirements for borrowers , which could make them riskier to invest in. Do the platforms check borrowers ‘ credit reports ? The best platforms are those that consider their borrowers ‘ credit score , financial history, income and other qualifications.
- Interest rates : APRs range from around 6% to %.
- Loan terms : Most loans range from two to five years and can be repaid in weekly or monthly installments.
- Fees: Some platforms charge a fee (usually 1%) to their investors. Other fees include origination fees , though the borrower is usually responsible for that. In some cases, a site may have a prepayment penalty .
- Average ROI: The return on investment varies based on site, but the average ROI is between 7% and 11%.
- Investor qualifications: In some cases, the investor must be accredited. In other words, they need to have a certain income before they can invest.
- Diversification: Some P2P platforms allow the investor to establish an IRA, Roth IRA or rollover 401(k) account for potentially higher returns.