What is Peer to Peer Lending? Peer to peer lending aka P2P lending lets you be the “banker” to other borrowers whereas the lending takes place between individuals. Sites like the Lending Club and Prosper serve as the middle man for people to connect – sorta like the match.com of lending. Just like a bank, P2P lending has its risks and rewards.
For starter, the borrower submit a loan application and the lenders get to see the credit risk when they fund the loan. For the Lending Club, borrowers must have a minimum credit score of 640. This is one advantage over Prosper’s minimum credit score of 520 for those who want to play it safe. Here’s what Lending Club has to say about setting its interest rate:
The mechanism for setting a fair interest rate is complex: it involves a proper assessment of the risk associated with each loan (based on the borrower’s credit history, current situation, income, debt and other factors), an understanding of the volatility associated with each level of risk, and a proper reward for that volatility. We have access to large amounts of information and historical data from the credit bureaus, which puts us in a unique situation to set attractive, fair and equitable interest rates. Rates also depend on the amount of the loan (with larger loans bearing higher rates).
Here’s a table of Lending Club for better illustration of the return rate:
Another advantage of Lending Club over Prosper is the minimum $25 to make a loan. Prosper requires a $50 minimum. From the above table, Lending Club’s interest rate is set. You can also make an automatic portfolio of loans with a minimum of $500. In both cases, the lenders and borrowers benefit from peer to peer lending. Borrowers get a lower rate compare to a bank. Likewise, lenders receive a higher return rate of up to 13%. Of course, Prosper and Lending Club benefit via taking a small percentage of the originating loan cost.
There is no guarantee of 13% return on your money, otherwise we all put our money into peer to peer lending. There is risk involved with peer to peer lending, and the best way to lower the risk is do your homework. Diversify your funds over several loans at different loan grade. I play it safe by loaning only to credit grade of A1 through A5 from Lending Club.
Besides Lending Club and Prosper, there is also Kiva. You are loaning out money to people in 3rd world countries. There is no money to be made since you only get the principle back. Of course, this is more like charity and your return is feeling good for helping other people. Props to people who go through Kiva.
The best part about Lending Club and Prosper is the sign-up bonus. Prosper requires you to loan out $50 to get your $25 bonus. Lending Club, however, gives you $50 for depositing $1000 (deposit $1 to get $25 bonus). There is no requirement to loan out the $1K. I highly recommend to use the $50 bonus money to do a “test drive” and feel them out.
I made several loans with Lending Club and Prosper. Personally, I prefer Lending Club’s website interface over Prosper’s. Other than the advantages I listed above, the account summary of your Lending Club’s account is much clearer. I can see everything from loan status to the composition of my loans. The details can be seen below:
Available Cash Detail help
Added Funds: ****
(includes In Funding) ( ****)
Principal Received: $****
Interest Earned: $****
Late Fees Received: $****
Processing Fees: ( $**** )
Adjustments Received: $****
Withdrawn Funds: ( $**** )
Funds Pending Withdrawal ($**** )
Referral Bonus: $****
Both sites give out referral bonuses. I thank all my readers for going through my links. Your support has been tremendous. THANK YOU.