Peer-to-peer loans (P2P loans), also known as marketplace or ‘fintech’ lending, began in the current online form in 2005, but it’s really just a more modern take on how communities supported their members in the pre-banking days, when individuals or groups of individuals would lend needed money to people they knew personally, subject to repayment agreements of greater or lesser formality.

P2P lending just takes this concept into the global internet age – individuals and even businesses can borrow or lend money via participation in one of a number of online P2P lending platforms – the oldest in the U.S., Prosper, as of May 2022, had facilitated loans amounting to over $21 billion to over 1.25 million borrowers since its founding in 2005.

For borrowers, P2P loans can be useful:

• To secure loans in smaller amounts than their bank(s) will lend.
• In the event of lower credit scores or more limited credit history than banks will accept for a loan.
• If you want to repay the loan in full prior to the maturity date – P2P loans rarely incur prepayment penalties.
• No collateral required – P2P loans are almost always unsecured.

However, the caveats here are:

• A potentially longer approval process, as loan applicants must be approved first by the platform itself, after which a willing investor must be matched up with the applicant.
• Often the loan interest is assessed at higher rates than a bank will offer – typical P2P loan interest rates are between 5.99% (for those with the highest credit scores) and 35.99% (for those with the lowest credit scores).

For those willing to lend money as an investment, the pros include:

• Higher rates of return than bank accounts or certificates of deposit (CDs) offer.
• Can start small – many platforms will open a lender’s account with as little as $25.
• Can choose the loan you wish to fund.
• Monthly payments are made directly to you via the P2P platform.

There are also cons for potential investors – in particular:

• These P2P loans are unsecured, and a borrower’s default often leaves the lender with little recourse to recoup loaned funds. Research indicates a default rate on P2P loans which may be as high as ~10% globally. In contrast, S&P/Experian’s Consumer Credit Default Composite Index shows a 2022 U.S. default rate across all forms of lending of ~0.59%, down from ~1.55% in 2012.

Both potential investors and potential borrowers should:

• Look into multiple P2P lending platforms – some specialize in a certain sort of loan. Prosper, noted above, focuses on personal loans, while StreetShares and others specialize in small business loan funding. Yieldstreet investors fund loans for purchases of real estate and art, as well as venture capital and private equity, among other purposes. Pick the platform that’s right for you and your goals.
• Carefully review all fees (e.g. loan origination fees, typically 1% to 8%) and other charges which may apply. Borrowers should note any late payment fees and/or additional interest charges if they fall into arrears.
• Read the terms and conditions with a magnifying glass, if necessary. Understand all the aspects of what you are about to get into.

P2P loans can be a good investment vehicle. However, we strongly urge you to consult with us before entering into any potential risk.

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Until next time ̶

Peace,

Eric