Since the development of Prosper, the first peer to peer lending platform, back in 2006 over one billion dollars has been loaned by individual investors. This type of lending allows investors to get higher returns on their money than with a typical savings accounts. In addition, those who are having trouble getting approved for traditional loans can usually find a peer lender to fund their needs.
The Terminology You Need To Know
As part of the lending process you will be supplied with necessary information about the borrowers before you agree to any terms. Some of this information includes:
If you are unfamiliar with any of these terms, it’s highly recommended that you research them before investing in any accounts. The peer to peer platform will also supply you with some of the borrower’s personal information so that you can do any additional credit history research.
What Are Notes?
Notes, known in the formal financial world as loan notes, are contracts for the different loans that you choose to fund. They will notate the amount, interest rate, payback period, and a few other details.
What To Know About Investing
When it comes to setting up your peer to peer account and investing in others, it’s important to take into account the things listed below.
What Peer To Peer Platforms Are Available In Your State?
Should You Diversify?
The simple answer is yes. These peer to peer platforms allow you to invest small amounts, alongside other investors, to fund one big loan. For example, if a loan request is for $1,000, you can opt for a $25 note. There is no reason you shouldn’t be spreading out your money.
Remember that peer to peer lending is just like every other lending process. The borrower could default on the loan and you could lose your investment. Limit your risk by diversifying your investment notes.
What Is The Risk?
As with many areas of finance, those who undertake more risk receive higher rewards. You have the opportunity for very high return rates through these platforms. Just remember that the higher the return, the more of a risk the borrower is.
Are You Locked In Until The Loan Expiration Date?
When you sign on for a loan note, your money is considered locked in until the loan is repaid. Some peer to peer platforms are allowing a secondary marketplace that lets investors buy and sell notes. This means if you want to get out of a note early, you can essentially sell the note to another investor through the secondary marketplace.
How You Can Obtain Notes?
On Your Own
If you would like to know more about the individuals requesting the loan and do your very own thorough screening, than doing it on your own is the best option. This is mainly for those who have the time to look through potential notes.
This method is a step up from the on your own option. This allows you to put in specific criteria to search for all notes that match it. The compare automatically option is best for investors who don’t want to spend the time on the on your own method, but still want control over the final decision of whether to invest or not.
Most commonly available at Lending Club and Prosper, this method allows you to set up multiple layers of criteria to scan notes for. You specify what percentage of your investment money you want to invest in each type of criteria. This is best used by investors who have a large sum of money and don’t have the time to set up many different notes.
Peer Lending Platforms
There are three popular peer lending platforms. These include Prosper, Lending Club, and WikiLoan. All of these platforms come with different minimum investments, account fees, and return rates.