After the economy crashed in December 2007, nascent online peer-to-peer (P2P) lending platforms quickly grew. They’ve since evolved into an increasingly popular investment alternative to Wall Street and other traditional options.
Peer-to-peer lending isn’t new and it’s no passing fad, says P2P pioneer Brendan Ross, president of Direct Lending Investments LLC, (www.dirlend.com), which runs a short-term, high-yield small business loan fund.
“It’s a rebirth of the simplest and oldest way of making money: one individual loaning money to another and getting paid back with interest,” Ross says.
What makes this new incarnation different is accessibility.
“Online lenders like IOU-Central and Prosper.com make it easy for prospective lenders to find and fund borrowers through a website,” Ross says. “These platforms have automated the underwriting process, including checking credit and looking at applicants’ bank accounts, so they can vet borrowers based on reliable information.”
Each online lending platform operates differently, but all vet applicants. The lender posts qualifying requests on its website, and private investors decide which to fund, either in their entirety or in part. At Lending Club, for instance, investors can choose to lend the entire amount requested by a borrower, or as little as $25 to multiple borrowers, which adds protection if one defaults.
Investors can manually choose which loans to fund, or they can ask the platform to choose within certain parameters. Yields on a portfolio of loans can be 10 percent or more, Ross says. He offers these tips for investors in three tiered financial levels:
Investing $10,000 to $24,000: Visit the Lending Club and Prosper.com websites, and choose the one that most appeals to you, Ross says.
“Open an account in a tax-deferred IRA and shift a portion of your investments out of stocks and into lending,” he says.
The reason for that is interest income is taxed at a higher rate than the capital gains from stocks. Deferring those taxes until you begin spending from the IRA will help keep a lid on your current tax bill.
Investing $25,000 to $100,000: At $25,000, you have enough money to start getting professional advice about which loans to choose and how much to invest in each.
“I recommend going to www.lendacademy.com/invest because it’s run by Peter Renton, who’s very knowledgeable,” Ross says. “You choose between a conservative or balanced portfolio – I recommend balanced for higher yield — and they’ll choose the loans for you and put them in your account.”
The fee is just 0.95 percent.
Investing more than $100,000: Accredited investors have privileged access – they can shop around for private fund pools, Ross says.
“As P2P matures, borrower categories that have always had the highest yields, such as small businesses, become available as private fund pools that are managed to deliver the highest yields,” he says.
These pools form mutually beneficial relationships with the P2P lending platforms, allowing the platforms to serve a larger volume of borrowers. The private funds get well-vetted borrowers from the platforms and manage the funds to the maximum benefit of all their investors.
“Everybody wins,” Ross says, “including the borrowers, who get fast loans at reasonable rates.”