Financial Poise
Peer-to-Peer Lending

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

Investing in Peer-to-Peer Lending Can Provide High Returns, Diversify Your Portfolio and Help You Give Back to the Community

Peer-to-peer lending has been a hot topic in the investment world for several years now. Also called marketplace lending, it allows retail and/or institutional investors to lend money to borrowers online without the use of a traditional intermediary like a bank.

Its popularity in the investment world has only increased in the last few years, following the IPOs of some of the largest players in the online peer-to-peer lending space, including Lending Club, OnDeck and Upstart. And experts expect the growth to continue. Indeed, in 2019, the global peer-to-peer lending market generated $67.9 billion in 2019. By 2027, it is estimated to reach $558.9 billion, with a CAGR of 29.7%.

It’s not hard to see why. Investing in peer-to-peer lending allows investors to provide loans for small business, personal, real estate and even student loans. It’s quickly become an attractive strategy for many investors, due to the outsized returns on these fixed income assets.

Additionally, by cutting out the bank, peer-to-peer lending allows investors to pocket more of the interest. And for many investors, knowing their money is helping another person or small business succeed makes the investment even sweeter. If you’re looking for a way to diversify your portfolio, investing in peer-to-peer lending may be the right move. Here’s what to know before investing.

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

First, let’s take a 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 in large part due to the global financial crisis and the resulting “credit crunch” that began in 2007-08. During this time, banks dramatically increased the credit requirements for consumers to obtain mortgages, auto loans, credit cards and other loan products. Since credit is so critical to our economy, alternative lenders saw a surge in popularity, especially for personal or small business loans. Plus, new technologies enabled lenders to create sophisticated platforms and algorithms to expand their reach and attract more quality borrowers and investors.

Simultaneously, the Federal Reserve drastically lowered interest rates and government bonds quickly shot up in price, with a corresponding decrease in yield. To this day, the 30-year Treasury bond yield is less than 2%.

Fixed income is an important part of most investors’ portfolios, but the rates of return for this asset class were dramatically cut as a result of low interest rates. Investors were incentivized to look for yield in other assets, and peer-to-peer lending became an attractive area for some looking for higher returns for fixed income assets through the private credit markets.

Now, a variety of multiple online platforms make investing in peer-to-peer lending as easy as clicking a button. And with some platforms requiring only a minimal investment of just $25, it offers investors a simple, easy way to invest.

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. Peer-to-peer lending provides investors with access to loans that perform better than more traditional types of fixed income products. Many peer-to-peer loans see a typical 5-9% net return per year, and many peer-to-peer investors report annual investment returns of greater than 10%.
  2. Peer-to-peer lending allows investors to diversify across many loans, reducing risk and driving solid 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. Investors can choose where their money goes. For example, small business-specific marketplace lending platforms like Dealstruck and Funding Circle make it easier for investors seeking to invest just in small businesses. Real estate lending is emerging as another potential goldmine as well, including platforms such as ShareStates, Patch of Land, Realty Mogul, LendingHome and Money360. And the platform StreetShares allows you to invest in a Veteran Business Bond that helps veteran business owners across the country.
  4. 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 the terms “peer-to-peer lending” and “marketplace lending.” The names are relatively interchangeable, and only represent where the majority of the investment capital comes from.

For example, with peer-to-peer lending, individuals lend directly to borrowers. With marketplace lending, institutions can loan out money alongside retail investors.

For many marketplace lending platforms, most of their loans are sold to institutional investors. These include hedge funds, insurance companies, pension funds and—perhaps surprisingly—banks. The marketplace lending space started off as a true marketplace for retail investors to connect with those in need of fast financing, though it’s now heavily dominated by institutional investors.

Nonetheless, both marketplace lending and peer-to-peer lending platforms allow investors to build their own portfolios. More than that, the space is one of the best examples of how finding investments is changing through the advent of new technology, such as FinTech and automation. Indeed, third party tools like NSR Platform now allow retail investors to completely automate their investment decisions, making investing in peer-to-peer-lending more streamlined than ever.

Building a Customized Portfolio

The choices available to those interested in 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 invest in profitable small businesses in need of a loan, from anywhere in the world.

Additionally, peer-to-peer lending platforms’ ongoing incorporation of artificial intelligence allows investors to make better informed decisions. For example, Upstart’s AI software evaluates borrowers on a variety of variables such as education, occupation and employer, assigning each an annual percentage rate based on likelihood of default. Upstart also allows investors to set up a self-directed IRA using the investments from peer-to-peer lending.

And while there are more opportunities available to accredited investors, there are a growing number of options for non-accredited investors as well. For example, StreetShares, Prosper and RealtyMogul.com all offer ways for non-accredited investors to invest.

Peer-to-peer lending is emblematic of the explosion of options available to investors in the alternative assets market, and it will likely continue to have a significant effect on their future asset allocations.


[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: All About Asset Allocation, Due Diligence Before Investing, Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds. This is an updated version of an article originally published on June 3, 2015.]

©All Rights Reserved. February, 2021.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

About Jeff Ball

President and CEO of Visio Financial Services.

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