Peer-to-peer (P2P) lending sounds exactly like what it is — a form of online lending in which individual investors work directly with people or businesses seeking loans.
If you're thinking about the risks involved in investing in peer-to-peer loans and instead, would rather invest in the companies themselves, that's one route to take.
Let's walk through how peer-to-peer lending works, how to invest in peer-to-peer lending sites and the best picks for this year.
How Peer-to-Peer Lending Works
You can find peer-to-peer loans on online lending platforms, and those who want to get peer-to-peer loans must go through a prequalification process to find out if they're eligible for the loans. A lender will give them an estimate of the loan terms, interest rate and fees. They can then submit their application based on these estimates. The lender will also perform a hard credit check and the applicant will learn whether they will get approval of your loan.
Next, the loan moves to the funding stage, where multiple investors take a look at the loan. Lenders can decide whether or not to fund all or a portion of your loan, and it largely depends on how much you want to borrow.
Those who seek peer-to-peer loans can gather enough loans from enough lenders and receive an electronic transfer. Lenders will receive your disbursed fixed monthly payments based on your repayment terms.
It's important to note that while P2P lending is legal in the U.S., the federal government does not insure investments. If the borrower defaults on payments, investors could lose out on the entire investment.
The Best Peer-to-Peer Lending Sites for Investors
Let's take a look at the best peer-to-peer lending sites you may want to consider this year, both from investing in a publicly traded company and direct investment as a P2P lender.
LendingClub Corp., headquartered in San Francisco, is a fintech marketplace bank that lends education, finance and auto loan services. The company offers personal, education and patient finance and auto loans. Members can gain access to a broad range of financial products and services through a technology-driven platform, which aims to help people spend less when borrowing and earn more when saving.
Lending Club faced a record full year in 2021, with revenue of $818.6 million, up 157% compared to 2020. Marketplace revenue was 136% higher and net interest income grew 259% year over year. Lending Club achieved GAAP profitability during 2021, with net income of $18.6 million for the year ended December 31, 2021, compared to a net loss of $187.5 million in 2020.
Key achievements for the year include acquiring and integrating the bank, consolidating the personal, auto refinance and purchase finance loans onto one origination platform, and accelerating membership acquisition.
A new recurring stream of net interest income grew 27% sequentially to $83.1 million, as the bank's loan portfolio grew 22% from September 2021. Net income was negatively impacted by $56.6 million of notable items: $39.5 million of current expected credit loss (CECL) provisioning, less net charge-offs and $17.1 million of net revenue deferrals both driven by strong retained loan growth. Earnings per share therefore went down $0.53 in Q4 2021.
Upstart Holdings Inc., headquartered in San Mateo, California, is a cloud-based artificial intelligence (AI) lending platform. The company's platform connects consumers, banks and institutional investors through a shared AI lending platform based on true risk. Upstart aims to improve access to affordable credit while reducing the risk and costs of lending by more accurately identifying risk and avoiding traditional credit-score based lending models.
In Q3 2021, Upstart's total revenue was $228 million, an increase of 250% from the third quarter of 2020. Total fee revenue was $210 million, an increase of 235% YOY. Bank partners originated 362,780 loans which totaled $3.13 billion, up 244% from last year.
A few highlights from Q3:
- Income from operations was $28.6 million, up from $12.2 million last year.
- GAAP net income was $29.1 million, up from $9.7 million in Q3 2020.
- Adjusted net income was $57.4 million, up from $12.3 million in 2020.
- GAAP diluted earnings per share was $0.30, and diluted adjusted earnings per share was $0.60.
- Adjusted EBITDA was $59.1 million, up from $15.5 million last year.
Upstart expects Q4 revenue to increase from $255 million to $265 million, net income of $16 to $20 million, adjusted net income of $48 to $50 million and adjusted EBITDA of $51 to $53 million.
Prosper
We'll end with a non-publicly traded option. If you want to invest in Prosper, you have to choose to invest in its marketplace, in personal loans and home equity. Create your account and build a custom portfolio by selecting individual loans or using Prosper's auto invest tool. Money will get deposited monthly into your Prosper account. Prosper has facilitated more than $20 billion in loans to more than 1,190,000 people since 2005. Prosper handles all loan servicing on behalf of the matched borrowers and investors.
Prosper Marketplace, backed by leading investors including Sequoia Capital, Francisco Partners, Institutional Venture Partners and Credit Suisse NEXT Fund, may be an option for you if you want to invest differently.
In December 2021, approximately 60% of loan originations were rated AA-B and average loan size remained relatively flat month-over-month. The median monthly payment on Prosper loan to income (PTI) ratio for December was 5.25%. The weighted average borrower rate for December originations remained stable month-over-month.
Consider P2P Investing for New Opportunities
If you're looking for other opportunities, consider peer-to-peer lending to make an impact on your portfolio. They can offer a high-yield option but it's important to remember that they come with risks. P2P lending platforms require lower minimum credit thresholds than traditional banks, which would mean a higher default risk on loans. Do your research before you decide whether P2P investing makes sense for you.
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