We will examine the pros and cons of investing on peer to peer lending platforms like Prosper and Lending Club. I will use personal experiences to give you practical insights and comparisons to other forms of investments readily available to investor.
In 2014 alone, Peer to Peer lending (P2P) platforms in United States issued approximately $5.5 Billion in loans – that is about half a million borrowers and several million lenders.
A very quick primer about how it works – there are these websites called ‘marketplace lenders’ – Lending Club and Prosper are the biggest ones in the market today. Let’s say John Doe needs $10,000 to make home improvements. He registers with one of these marketplaces, fills in his details (income, location, occupation etc – mostly standard underwriting parameters used by banks).
Based on the underwriting done by the marketplace, John is assigned a loan category (For example, A B C D E) and an interest rate (corresponding to the riskiness of the loan depending mostly depending on the category). Once John accepts the terms, the loan is available on the website for investors like me to invest. Usual minimum is $25, I do not think there is a maximum (I have personally done till $400 per borrower). At $25, it will take 400 investors to make $10,000 to lend to John.
Once John starts to make monthly payments, investors like me start to get our money (and interest) back.
My analysis below has three sections: understanding where this new asset class (sub class) fits in the traditional portfolio, pros of P2P lending, and cons of P2P lending.