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Peer to Peer Lending Explained – Best P2P Lending Sites 2019

Last Updated: 12. September 2019

Fintech is gradually revolutionizing the global finance scene – one of the most recent changes is Peer to Peer lending, which seeks to cut out the bank’s traditional role when it comes to giving out loans and other forms of personal cash to borrowers.

Peer to Peer lending is a recent financial revolution that is set to become a $1 trillion industry.

Instead of saving all your cash in a bank account that earns less than 2% interest or stressing over the best stock or shares to buy, you now have the option of earning in excess of 10%, passively, on the cash you deposit with an online P2P lender.

What is Peer to Peer Lending?

Peer-to-peer lending, also frequently referred to as P2P lending, involves lending money to individuals and companies through online services, which match lenders with borrowers.

Because peer-to-peer lending companies operate online, without a high-street presence, they have significantly smaller overheads, and this can then be passed on to consumers in more competitive interest rates and associated costs. The emphasis is on nimbleness, agility, and convenience, rather than the traditional, and sometimes stuffy, the appearance of established financial sector organizations.

However, peer-to-peer lending also differs from the traditional alternative by being an investment opportunity that is frequently conducted for profit. Because of this, peer-to-peer lending is often characterized as being an alternative financial service. Also, although it was originally envisaged that peer-to-peer lenders would be entirely separate from the established financial architecture, as the sector has grown and developed, so partnerships have increasingly been sought with established players.

Lenders in the peer-to-peer sphere are also more likely to offer credit to those who struggle to acquire it from traditional financial institutions. This can particularly include younger people, and thus peer-to-peer companies, and fintechs in general, are often branded in such a way as to appeal to the millennial generation.

How does peer-to-peer lending work?

Considering the way that the peer-to-peer sector works, most P2P lenders provide online investment platforms, which enable borrowers to attract lenders, and investors to identify and purchase lending opportunities that meet their requirements. Peer-to-peer lenders have also developed their own independent credit models, which have enabled them to suitably price and deliver approval for loans.

This is a rapidly developing sector, and thus a huge amount of competition has arisen in a fairly short timeframe. There are lots of peer-to-peer lenders competing for your custom, and attempting to separate the wheat from the chaff can be something of a baffling process. So in this article, we’re going to examine five of the top peer-to-peer lenders available, and explain exactly why you should opt for their services.

Why invest with a p2p lending website?

  • Not affected by stock markets: P2P lending institutions are listed with the stock exchanges. How much you make here is therefore not directly affected by fluctuation in the equity markets and can, therefore, be used as a hedge against your share and stock interest.
  • Offer higher rates compared to shares and banks: Most savings accounts by banks have their interest rates way below 3%. Not even the fixed income securities offered by the corporate and treasury bonds can match the 10%+ interests rates offered by the most peer to peer lenders.
  • You don’t need to be an accredited investor: Most stockbrokers won’t facilitate your share and equity investments if you aren’t an accredited investor. You, however, don’t have to be an accredited investor to deposit funds with a P2P lender.
  • 100% Passive income: Unlike such investments like stock and forex investments where you have to spend hours on end researching and analyzing different products, P2P lending is 100% passive. Some lenders even have auto-investing tools that automatically redirect your paid principle and interests to the market.
  • Affordable minimum investments: While most investment vehicle currently available require huge initial deposit amounts, most P2P lenders have relatively affordable deposits, starting from $25.

What are the pros and cons of investing in a P2P scheme?

Pros

  • Some support goal based investing thus good for longer-term projects like IRA savings
  • Most support secured investments ensuring you never lose your money
  • Some support secondary markets where you can quickly liquidate your investments in case of emergencies
  • Screening borrowers by the P2P company ensure you are booked with an individual or business that is least likely to default
  • In case of consistently failed payments, the company conducts follow-ups and initiates recovery on your behalf

Cons

  • High incidences of defaulters, as much as 4% for U.K based Zopa in 2017
  • P2P instruments aren’t publicly traded making them hard to liquidate, especially were lenders don’t have secondary markets
  • Your returns here are treated as ordinary income and thus attract 15% tax
  • Where loans are unsecured, you stand to lose your investments in case of default given that most P2P lenders aren’t insured

Criteria used to rank the best P2P lenders

The P2P lending world is awash with countless lending sites, each claiming to have the best rates and the most reliable services. How then did we identify the most reliable lenders that you can register and invest your funds with? Here are some of the aspects of the trade that we used to vet these P2P lenders:

  • Average annual return on investment
  • Are they regulated or not?
  • Management fees and trading cost
  • Ease of liquidating your investments (secondary markets)
  • Security of the invested loans
  • Regulation and reliability
  • Borrower’s vetting process
  • Follow up on late payments and defaulters
  • Acceptance of accredited/unaccredited investors

5 best peer-to-peer lending sites

1. Lending Club

Any discussion of peer-to-peer investments must begin with Lending Club, which has become one of the most established companies in this sector. Lending Club has already loaned over $35 billion to customers, and is also something of a pioneer, having become the first ever publicly traded peer-to-peer lending company, back in 2014.

The market dominance of Lending Club in peer-to-peer is such that the company is currently associated with a 45% share of the peer-to-peer sector. This means that it has no requirement to seek out sub-prime business, which has the knock-on effect of ensuring that Lending Club is the ideal borrower for those with good credit ratings. However, it is highly unlikely that borrowers with poor credit ratings will be able to acquire funding from Lending Club.

Lending Club offers loans with terms between one and five years, while interest rates are always fixed for their products. Origination fees range from 1.99% to 8.99% with this company, and the fact that Lending Club doesn’t charge penalties for paying loans off early is certainly a welcome facet of the business and something that we looked for across all of our recommendations.

It should also be noted that this company has an excellent online reputation, with reviews of Lending Club almost without exception exemplary. This counts for a lot in a relatively insecure field such as peer-to-peer lending, and it is good to know that this is one provider that you can really trust with your money.

Lending Club also has a nifty automation process, making investing with Lending Club that much easier, while borrowers are also offered the options of both joint and trust accounts. Lending Club is not the provider with the best returns, nor will it be available to all borrowers, but does present the closest to what could be considered an established company in this embryonic sector.

Pros

  • Makes it possible to automatically re-invest your returns thus expanding your portfolio
  • You can diversify your investments (Loans) by lending to different notes, thus minimizing risk exposure
  • You can use LendingClub to hedge against your stock market investments
  • Their folio investing option gives you a quicker way out of investments
  • Potentially higher returns when compared to conventional fixed-income investments like fixed rate bonds in the UK.

Cons

  • Their 1% service fee on every payment received eats into your potential gains
  • Your lending club investments (loans) are unsecured
  • Doesn’t guarantee fixed incomes

2. Upstart

Upstart has a very unique approach to peer-to-peer lending and evaluates a great deal more than merely your credit score when attempting to understand your creditworthiness. Upstart can be considered a company that specializes in delivering services to educated and informed borrowers, as the company also assesses your education, area of study, and working history before coming to a lending decision. This innovative approach has particularly found favor with younger people, considering the prominence of higher education among the millennial generation, not to mention their borrowing difficulties.

Interest rates of a maximum of 8.85% are offered by Upstart, and generally, this company is pretty competitive with regard to the cost of borrowing. However, those looking for a shorter term loan should definitely go elsewhere, as Upstart only provides loans with either three or five-year terms. The good news, though, is that, in common with Lending Club, there is no penalty for pre-paying any borrowing with Upstart.

Upstart also offers investment opportunities, with the possibility of setting up an IRA on the site made available. This is not particularly common in the peer-to-peer niche, and thus Upstart definitely merits serious consideration. It is also worth noting that the average income of borrowers at Upstart is $83,000 in the United States, meaning that all lenders have an excellent chance of getting a decent return on investment.

In promoting itself to borrowers, Upstart comments that it acquires 175% more approvals with the same default rate as compared to big banks, with 75% fewer defaults with the same approval rate as big banks based on how borrowers are qualified. The bottom line is…you’re more likely to get a loan with Upstart than any high street bank, while this company is established enough for your money to be perfectly safe.

Pros

  • Attractively low minimum investment starting from $100
  • Has the lowest monthly service fee of 0.5% compared to other p2p lenders
  • Allows for automated investing
  • Allows for the smooth transfer of funds to your bank

Cons

  • Only open to accredited investors
  • Their P2P loans are unsecured

3. FundRise

FundRise is another innovative peer-to-peer lender that has particularly focused on the housing market. FundRise attempts to attract landlords, with its unique approach that is focused on real estate. When you invest your money with FundRise, you are investing in private real estate that is purchased through a negotiated sale, which helps to keep prices low. It’s also possible to make a single investment, and then diversify this across multiple real estate assets, providing real flexibility to FundRise investors.

There is a fairly low bar set for investing with FundRise, but it is still higher than some other custom lenders, meaning that some individuals will be priced out of this market. Annual returns with peer-to-peer have been extremely impressive, with historical figures indicating that 8.7% to 12.4% is entirely realistic.

This is also a highly user-friendly peer-to-peer site, which makes getting started with investment relatively easy. FundRise will review your investment goals for you, and then select appropriate investment trusts for your money. There is plenty on offer with FundRise, and this is definitely a peer-to-peer lender that will appeal to the ambitious investor.

Pros

  • With returns averaging at 11%, you gain more than you would with bank saving account
  • The lender can buy back your investment within 90 days if you don’t like the platform
  • Maintain relatively diversified investment portfolios
  • 100% passive income
  • Goal-oriented form investing with the option of growing your funds or steady income source

Cons

  • It is an illiquid investment as their eReits and eFunds aren’t publicly traded
  • Relatively high management fees, often up to 3%, eats into your net returns
  • Returns here are treated as ordinary income attracting 15% tax rate

4. Funding Circle

Funding Circle is another massive name in the peer-to-peer sector and one which has already demonstrated its significant viability in the financial world. Funding Circle works closely with businesses and is thus the ideal lender for small businesses looking to gain access to much-needed cash flow. However, it should be noted that this isn’t a lender liable to take risks, and any business will have needed to prove its viability before borrowing from Funding Circle.

Large amounts of credit are on offer with Funding Circle, though, with periods of one, three, and five years available. One of the impressive things about Funding Circle is the speed with which the whole process takes place, with the business delivering cash borrowed in as little as five days. This is a highly experienced leader in the peer-to-peer space, which has already worked with over 40,000 businesses in both Britain and the United States.

Rates are highly impressive with Funding Circle, but it should be noted that there is a 4.99% origination fee, based on the amount of money that you are financing. This is typical of the sector and should be considered broadly competitive, but it is an extra expense that needs to be factored into the equation. Business loans are also competitively priced with Funding Circle, with these beginning as low as 5.49%, however, you do need decent creditworthiness in order for borrowing from Funding Circle to pay off, as the business is willing to charge interest rates of 29.99% for its least trusted borrowers.

What this means is that Funding Circle isn’t really a lender for the small fish in the pond, or the company trying to make a name for itself. But this is undoubtedly one of the most established and esteemed firms in the peer-to-peer sphere, underlined by the fact that the British government trusts Funding Circle with some of its money.

Tens of thousands of other investors and banks have also invested in Funding Circle, and the company has attracted around 5,000 reviews on trustpilot.com; the vast majority of which vouch for the quality of the company.

Funding Circle is a great peer-to-peer lending business, and established companies should definitely check them out.

Pros

  • Loans are secured minimizing cases of default and loss
  • Low minimum investment of $100
  • Allows auto-investments
  • Relatively low turn around period for loans, as low as 6 months
  • Freely accessible secondary market make for quick disposal of your investments

Cons

  •   No secondary market for their loans
  • You might consider their 1% management fee quite expensive
  • Most loans are relatively unsecured

5. Prosper

Those looking to support a pioneer could definitely do worse than get involved with Prosper, as this was the first ever peer-to-peer lending site. Prospect definitely doesn’t dominate the market, but in the nearly 15 years since it was founded it has secured over $13 billion in loans for its thousands of customers.

Transparency is the watchword with Prosper, with the company making it straightforward to observe the company’s interest rates, without impacting on your credit score. It is slightly disappointing that the site doesn’t offer one-year terms, but pre-payment can be done early without any form of a penalty. Origination fees are impressive, though, with the lowest rates on offer a mere 2.41%; highly competitive in this industry.

Prosper also supports investment, and there are seven different risk categories available, all of which are made entirely clear to borrowers. Prosper suggests that investors can expect to achieve a 4.90% return on AA investments, which rises to a hefty 13.48% for the riskier E grade investments.

Considering that Prosper has such a low barrier for entry, and all of its financials combine to make a very attractive package, this is definitely one of the most compelling peer-to-peer lenders on the market. This is particularly true as Prosper has been around for so long, and has been so committed to the concept of peer-to-peer borrowing and lending.

Pros

  • You don’t have to be an accredited investor to join Prosper
  • You can start investing with as low as $25
  • Provides a borrower credit history to help you filter out possible defaulters

Cons

  •  Limited investment diversification options compared to most P2P lenders

Bottom line

There exist countless peer to peer lending websites that won’t just help you earn a steady income from your investment but will also help you save towards a particular goal. You just need to learn how to differentiate between reliable and unreliable lenders. On this list, we include what we consider the best in terms of high returns, guarantee for your investments, lowest minimum investment, liquidity in case emergencies, and support for goal saving. Start by figuring out your priorities and matching them with the most suitable lender. For instance, do you want to invest your cash but still have quick access to it in case of emergencies? Invest in P2P brands with active secondary markets.

FAQs

How do peer-to-peer lenders make money?

Peer-to-peer platforms generate origination fees that are charged to borrowers, while interest charges also accumulate further revenue. In this respect, peer-to-peer lenders are not too different from traditional bank loans.

Are P2P platforms regulated?
The worst mistake any investor can make is to join and commit their money in funding ventures on a platform that’s not legally regulated. An unregulated business environment has all the hallmarks of a black market, and that means that the risk of you losing loads of money is optimal. Why would anyone want that?
Luckily, peer-to-peer platforms are regulated by the relevant authorities in the countries where they operate. In the event that you want some help in sorting out an issue, you can contact the Securities and Exchanges Commission or any other national body tasked with overseeing the platforms.

Can I diversify across different borrowers?
In an environment as active as a lending platform, you bump into all sorts of loan requests spread across a number of different lending options. You can spread your investments across these options and stand to gain by reducing the risk of loss and increasing your overall investment volume. Also, you boost your turnover and money circulation around various lending drives.

In essence, the trick is to avoid funding any loans in full. That way, you reduce the amount of your money exposed to a single risk. If one loses a small amount, the interest gained from the rest can always cover it and cushion you from a net loss.

Do I have to contribute the full amount of a borrowers investment?
When you join a peer-to-peer lending platform as an investor, you have a choice to either fund a borrower’s guaranteed approval loan in full or contribute an amount to it. The latter plays out when different investors release proportions of their money to partially fund one person’s loan. The interest paid on the full amount is then distributed to the involved lenders respective of their contribution amounts.

Whenever you come across a loan request that interests you, you can always contribute to it as opposed to footing the whole bill.

Is there any government protection for peer-to-peer lending?

No. Unlike bank and building society savings, any money lent via P2P websites is not covered by the Financial Services Compensation Scheme, nor any equivalent government schemes. The Financial Conduct Authority is regulating P2P lending, and there is now a requirement for lenders’ money to be ring-fenced. But some peer-to-peer lenders have still hit problems, and this can definitely impact on those who choose to borrow from these companies.

What are the risks associated with peer-to-peer landing?

Firstly, there is a risk of default, and as we have just mentioned this would not be covered by any government support. While several peer-to-peer lenders have contingency and provision funds, the risk is still clearly higher than with a traditional high-street bank, for example.

Another potentially serious issue is that the peer-to-peer lending site that you choose could go bust. Several such companies have gone out of business previously, which is why we have recommended several of the best current peer-to-peer lenders here.

For one, many investors love the peer-to-peer lending arrangement by virtue of its good profits. They get to rake in some nice interest from their investments while the borrower gets a loan at low cost. In fact, the interest you get from peer-to-peer lending deals could well be higher than what you could get by investing with banks.

Is money earned through peer-to-peer lending taxable?

Usually, yes. It is almost always the case that money and through peer-to-peer lending is classified as income, and therefore is taxable, assuming that you reach your personal allowance for a given tax year. £1,000 worth of interest every year is tax-free in the UK, though, so in the current low interest rate environment, this won’t impact on many people. However, it should be noted that higher rate tax payers are only afforded an allowance of £500, so this is more likely to impact on you if you have a significant level of income.

Does peer-to-peer lending show up on your credit report?

Yes. If you apply for a loan with any peer-to-peer lender, your credit report will definitely be checked. This will then create a hard credit check on your credit file, which will remain for a period of one year. It is possible, as with any credit application, that this could then temporarily reduce your credit score. And, of course, rejections for peer-to-peer loans are more likely to reduce your credit score further still.

What is peer-to-peer business lending?

Many peer-to-peer websites offer loans to businesses, which tend to pay the highest rates of return for investors. There are a wide variety of providers available on the market in this sphere, and all of the facets of personal and peer-to-peer lending apply similarly to the business market. With many smaller businesses struggling to acquire credit from traditional financial institutions, it is expected that peer-to-peer business lending will continue to grow in the coming years.

Can I withdraw money from my P2P account?

This is often only allowed at the end of the financial term, but is dependent on the terms and conditions associated with the individual lender. Furthermore, it is sometimes possible to sell your investments to another investor in order to get your money back.

Can I find out how stable a P2P company is before I invest?

Yes, although this differs slightly to the way that traditional financial institutions are assessed. It is possible to research the percentage of completed repayments that lenders have had from previous investments, which is usually publicized on the company’s website.

How can I reduce the risk to my money in P2P?

Aside from following the tips and advice contained in this article, the best way is to invest your money with several borrowers, which will reduce the risk that your money will never be repaid.

History of P2P Lending Infographic

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All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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Nica is a BA Political Science degree holder who fell in love with writing after college. She specializes in financial technology and cryptocurrency. At her young age, she was already able to work with founders who graduated from Harvard, tech startups funded by Y-Combinator, CEOs of multi-million dollar blockchain companies, investment companies in London and many more.

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