Photo (cc) by Tracy O
With banks paying negligible interest rates on savings accounts, you may be looking for better-paying investments — or better yet, you may become a banker of sorts yourself through peer-to-peer lending.
Risk, however, runs higher than FDIC-insured savings deposits. The peer-lending accounts are not insured. And if a borrower defaults, you could sustain the loss of the entire amount you loaned. Still, there are ways to control your risk in this folksy sounding but fast-growing, high-tech industry.
This time, it’s personal
In peer-to-peer lending, you decide which borrower may get your money.
“If you got into credit card debt in college, and now you’ve got a stable job but are paying off credit card debt at 23 percent interest, and I want to loan you money at 15 percent interest, that’s a win-win for both of us,” investor Carey Villeneuve told Money Talks News’ financial expert Stacy Johnson. “I’ve been doing this since 2009 and thus far I’ve averaged 13.26 percent return on my investment — and I’ve not had a single default.”
You find borrowers through peer-to-peer online platforms. Started just 10 years ago, online peer lending has grown into a multibillion-dollar industry, and more people and companies are clamoring to join.
The pioneer is London-based Zopa, launched in 2005. Zopa’s 58,000 lenders funded more than $750 million pounds, or $1.1 trillion, in loans for more than 107,000 borrowers who said they would use the money for cars, home improvements, weddings or debt consolidation. The lenders, Zopa says, earned 46 million pounds, or $67.8 million, for an average rate of return of 5.6 percent after fees and any losses from bad debts.
Prosper and Lending Club, both based in San Francisco, dominate platforms in the United States, where the system operates a little differently than Zopa’s.
Lending Club has facilitated loans totaling more than $7.6 billion since giving out its first loan in 2007.
Prosper, founded in 2005, surpassed $2 billion in personal loans in 2014, a year it recorded a 350 percent increase in loan originations year-over-year. It recorded 250,000 borrowers.
Lending Club and Prosper both prescreen and rate loan applicants, post loans that need funding, offer terms for three or five years depending on loan size up to $35,000, take bids from lenders for as little as $25 each, and charge fees to borrowers and lenders.
For example, one Prosper listing shows a professional with an “A” rating in Alabama seeks a $15,000 debt consolidation loan at 7.49 percent interest. The borrower will pay $466.52 a month for three years. Prosper will take a 1 percent fee, so lenders will receive 6.49 percent. Prosper also notes that it estimates a loss of 2.24 percent on the loan if the borrower stops paying. You could bid for a piece of the loan action for as little as $25 or up to the full amount. When enough people say they will invest in the loan, it will be funded and each investor will receive a prorated amount of the borrower’s monthly payment.