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Peer Lending: Make Money While Helping the Community

Nov. 15, 2012
Investing, Investments
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Peer-to-peer lending has been one of the fastest growing methods of investment since Prosper Marketplace became the first such U.S. lender in 2006. In the past six years, over $1 billion has been lent by individual investors to help their peers in need.

There are many benefits to peer lending, such as steady returns with higher rates than many other investment vehicles. However, there are a few key pieces of information that every investor should be armed with, before pursuing profit from personal loans.

Terms and Terminology

If you’re not acquainted with how a loan works, make sure to read up before investing in one. As the lender, you will be provided with a large amount of information, all of which impacts the quality of the loans available.

Key Information:

  • DTI (Debt to Income ratio)
  • Number of Inquiries
  • Open Credit Lines
  • Delinquencies
  • Public Records

Most peer-to-peer lending sites will provide you with all this information, as well as some personal information about the borrower. But don’t feel like you should stop there! There are many sites, such as Nickel Steamroller, that publish historical lending data; you should use this to test strategies before purchasing notes, and especially before setting up any automatic investing systems.

Thing to Keep in Mind:

  • Can I invest with this company? No single peer-to-peer lending website is currently available in every state.
  • Diversify. Don’t put all your eggs in one basket. Most peer lending sites will suggest that you purchase at least 100 notes, especially if you choose ones in higher risk brackets.
  • Higher rates mean higher risk. Borrowers do default, which is why you receive higher returns when lending to people with dodgy financial histories.
  • Am I stuck with this borrower? Some peer lending sites have a secondary marketplace in which you can buy or sell notes. This can be very helpful if you need to liquidate your investments quickly.

Methods:

Depending on how much time you want to commit to the investment process, you have three options for investment methods.

  1. Do It Yourself. This method involves screening listings yourself, and individually choosing how much to invest in each note. If you are interested in devoting a fair amount of time to the investment process, or want to know about the borrowers, this method is for you.
  2. Automatically Compare. If you have a specific set of criteria that you would like to screen notes for, some sites provide you with the ability to automatically choose listings.
  3. Hands-Off. This method is only available to members of Prosper and Lending Club, and the accounts must be at least $25,000 in size. This is similar to the previous method, except that you can include multiple sets of search criteria; you can also decide what percentage of your account that you would like to be invested using each criteria set.

Where Should I Invest My Money?

Prosper

Minimum Investment: $25
Account Fees: 1% of outstanding principle
Net Annualized Return: 5.24% – 14.75% depending on credit grade

Prosper was the first U.S. based peer-to-peer lending site, and has since become one of the most popular. All Prosper loans have a term between 1-5 years, and the site has a secondary market in which investors can buy or sell their notes. In addition, the site offers QuickInvest and Prosper Premier as methods of sorting and purchasing notes, with less effort on the part of the investor.

Lending Club

Minimum Investment: $25
Account Fees: 1% of each payment
Net Annualized Return: 5.8% – 13.17% depending on credit grade

Lending Club is structured in a similar fashion to Prosper, however, their notes have terms of 3-5 years. But they have an active secondary market for notes, should you want to sell. Lending Club also has a Portfolio Builder tool, which sorts notes according to your stated criteria; it provides you with a summary, which you must approve before it will make any purchase. If you want the hands-off method, the Lending Club Prime account is entirely managed. You simply decide what return bracket you would like to be in (8%, 10%, etc.), and your account manager does the rest. But your account fee will be increased to 1.8%.

WikiLoan

Minimum Investment: $100
Account Fees: $9 per loan, charged annually
Net Annualized Return: You decide

WikiLoan investors create their own listing for borrowers. When you create an account, you decide on your account size, maximum pledge per loan, minimum interest rate, loan term and loan type. Borrowers can browse to find your profile, and you can similarly filter borrowers to find the ones you’re interested in, or set up an email alert for borrowers meeting your criteria. Each borrower decides the terms of their loan, but must hold to the minimums of a 3% interest rate and one-year term.  The website has been active for over a year, and there have been no defaults to date. The only downside to WikiLoan is the lack of a secondary market for notes; once you’ve committed funds, you can’t easily change your mind.