Is Investing In Peer-to-Peer Lending the Right Move for Your Portfolio?

The Benefits of Investing in Peer-to-Peer Lending

Peer-to-peer lending, also called marketplace lending, has been a hot topic in the investment world for several years. It allows investors to lend money to borrowers online, without a bank.

Its popularity in the investment world has increased in the last few years. Experts expect growth to continue after the IPOs of large online peer-to-peer lenders like Lending Club, OnDeck, and Upstart. Indeed, the global peer-to-peer lending market generated $517.2 billion in 2024. By 2034, it is estimated to reach $1.7 trillion, with a CAGR of 12.70%.

It’s not hard to see why. Peer-to-peer lending allows investors to provide loans for various purposes, including small businesses, real estate, personal expenses, and even student loans. Due to the outsized returns on these fixed-income assets, it’s quickly become an attractive strategy for many investors.

By cutting out the bank, peer-to-peer lending allows investors to pocket more of the interest. Many investors find it sweeter to know their money helps others succeed. Investing in peer-to-peer lending may be the right move if you’re looking for a way to diversify your portfolio.

Here’s what to know before investing.

Why Did Peer-to-Peer Lending Become so Popular?

First, let’s step back and explore why peer-to-peer lending has become so popular in the last decade, even for those historically wary of alternative investments.

This is mainly due to the global financial crisis and the resulting ‘credit crunch’ that began in 2007-08. During this time, banks greatly raised credit requirements for loans. This included mortgages, auto loans, and credit cards. With credit so vital to our economy, alternative lenders grew popular. This was especially true for personal and small business loans. New technologies let these lenders build advanced platforms and algorithms, which expanded their reach and helped attract better borrowers and investors.

At the same time, the Federal Reserve cut interest rates. Government bonds then soared in price, with a drop in yield. Today, the 30-year Treasury bond yield is less than 4.4%.

Fixed income is an important part of most investors’ portfolios, but low interest rates dramatically reduced the rates of return for this asset class. Investors sought higher yields in other assets and some turned to peer-to-peer lending. Now, a variety of online platforms make investing in peer-to-peer lending as easy as clicking a button. Some platforms require a minimal investment of just $25, offering investors a simple, easy way to get started.

4 Reasons To Consider Investing in Peer-to-Peer Lending

There are several reasons why investors should consider investing in peer-to-peer lending, including:

1. Higher performance: Peer-to-peer lending gives investors access to better-performing loans than traditional fixed-income products. Many peer-to-peer loans yield a 5-9% net return per year. Many investors report annual returns of over 10%.
2. Diversification: Peer-to-peer lending lets investors diversify across many loans. This reduces risk and boosts returns. Additionally, many platforms allow investors to select the level of risk. The higher the risk, the higher the estimated return. Investors can spread their risk out to provide their portfolio balance.
3. Self-Directed: Investors can direct their money as they choose. Small business-focused platforms like Dealstruck and Funding Circle cater to small business investment. Real estate lending is a growth area. Platforms like ShareStates, Patch of Land, and Realty Mogul offer opportunities. StreetShares even allows investment in Veteran Business Bonds, supporting veteran-owned businesses nationwide.
4. Volatility Reduction: Well-diversified portfolios of peer-to-peer loans perform consistently well — even during times of stock market volatility, rising interest rates, or low employment rates.

Peer-to-Peer Lending vs. Marketplace Lending: Are They the Same Thing?

Many people are confused about the difference between peer-to-peer lending and marketplace lending. In peer-to-peer lending, individuals lend directly to borrowers whereas in marketplace lending, institutions loan out money alongside retail investors.

Most loans on marketplace lending platforms are sold to institutional investors. These include hedge funds, insurance companies, pension funds, and — perhaps surprisingly — banks. The marketplace lending space began as a way for retail investors to connect with those needing fast financing. Now, it’s heavily dominated by institutional investors.

Nonetheless, marketplace lending and peer-to-peer lending platforms allow investors to build their portfolios. Additionally, it reflects the impact of new technologies such as FinTech and automation. Third-party tools like the NSR Platform allow investors to automate investment decisions.

Building a Customized Portfolio

The choices for investing in peer-to-peer lending continue to grow. With a few clicks, an investor can build a portfolio of hand-picked early-stage companies, specific real estate assets, or even profitable small businesses seeking loans. They can do this from anywhere in the world.

Additionally, these lending platforms incorporate artificial intelligence to inform investor decisions. Upstart’s AI software evaluates borrowers on a variety of variables such as education, occupation, and employer. It then assigns each an annual percentage rate based on the likelihood of default. Upstart also allows investors to set up a self-directed IRA using investments from peer-to-peer lending.

There are many opportunities for both accredited and non-accredited investors. Platforms like StreetShares and Prosper offer ways for non-accredited investors to participate.

Peer-to-peer lending represents the growing options in the alternative assets market and will likely continue to significantly affect investor asset allocations in the future.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Current Trends in Leveraged Finance
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3. Asset Sales in Receivership

This is an updated version of an article originally published in December 2017 and updated on February 20, 2023. This article was most recently updated by the Financial Poise Editors.] 

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