Peer to peer lending is not a novel idea. This type of personal lending has been around for almost as long as man has existed. But more than ever, this approach seems likely to become the foremost way to funding personal loans. Many factors have combined to launch this age old practice into the spotlight. And while peer to peer lending only made sense when there was personal contact between borrower and lender (which prevented this from becoming commonplace), technology has now made it feasible on a large scale for investors large and small. Transaction costs, once a prohibitive factor, have been reduced to levels at or below those of traditional lenders like banks. Borrowers can now turn to these new peer to peer lending platforms for virtually any type of unsecured personal loan. The ease of applying online makes it especially appealing.
While getting a loan via peer to peer lending may be similar to going through a bank, the lending side has created an attractive opportunity for investors who are willing to learn about this new option. There are several peer to peer lending platforms in the United States. The largest of these platforms is LendingClub, which is now issuing billions of dollars in loans each year. So let’s talk about investing in peer to peer lending with LendingClub.
With any investing, there is an emotional side to it. So before we talk about the numbers and logistics, let’s note that P2P lending investing can provide investors with a sense of taking control of their investments which is not available in many cases. First, investing in something relatively new is adventurous. Second, being able to compete with big banks is energizing. And third, reviewing borrower information and choosing the loans to invest in can make you feel powerful. In all, very few investments feel as great peer to peer lending.
The LendingClub platform is very innovative and user friendly. Investors can easily sort through loans and evaluate based on the criteria they feel are important. Of course, there is risk involved (which is true for any investment), so it is vital that investors understand the potential downside. Assessing borrowers is essential, so it is important to study the available information and formulate a solid Lending Club strategy. You should also be aware that In order to qualify as a ‘retail’ investor, you are required to have an annual income of about $70,000 or assets valued at $250,000. LendingClub is now available to investors in all states, although you should check to see if there are any requirements specific to your state.
Is LendingClub a good investment?
Most likely, the first question a potential investor will ask is: What kind of return can I expect from my p2p lending investment? Average returns for investors over the past 10 years have been approximately 4.5% per year. Some investors have seen a small loss of about 1% to 2% which other investors have achieved returns of over 10%.
The second most likely question for an investor is: How risky is my LendingClub investment? Loans are rated based on the credit scores and personal information of the borrower. The ratings go from a high of A to a low of D. The better the credit history of a borrower, the lower the interest rate. As an investor, you will need to decide how much risk you are willing to accept in return for potentially higher returns.
What do I need to know about peer to peer investing?
The first thing you need to understand before you invest is that diversification will help lower risk and ensure you meet your rate of return goals. Investors should put their money in at least 100 different loans. Many advisors even suggest 200 to 400 different loans.
You should also remember that loans from peer to peer lending investing are repaid monthly (with interest) over a period of three or five years. This means that you money is not easily accessible. If you may need some cash quickly then investing in peer to peer loans may not be the best choice
Finally, you should know that interest received is taxed at regular income rates, unless you are investing through an IRA account. The type of account you choose therefore has important implications to your net returns.
If you are thinking of joining the existing 199,373 plus investors, we advise that you to do a lot of research first and start small while you learn the ropes. In time you will learn how to design your portfolio and achieve a reasonable return on your investment.