For financial advisors interested in learning more about peer to peer investments, the following is a quick primer designed to provide the background of this growing alternative asset class.
P2P lending is a modern financial transaction that entails individual investors lending money online to individual borrowers. By eliminating the inefficiencies of traditional financial institutions, peer to peer lending provides lower rates of interest to borrowers and high, non-volatile returns to investors.
Driven by technology innovation and the growing acceptance of online marketplaces, p2p is now a major aspect of consumer credit access, particularly as many banks have stepped back from consumer lending after the global financial crisis and the implementation of Dodd-Frank. According to PwC, p2p lenders originated $5.5 billion in consumer loans in 2014 and are on the way to $150 billion by 2025.
The leaders in consumer online lending have been companies such as Prosper and Lending Club who have developed their platforms to tap into this unfilled need and have created a fast-growing niche in consumer finance. Prosper and Lending Club are platforms where individuals, looking for lower-interest loans than they can secure through a bank, are paired up with investors who want a solid, steady return.
Historically, the majority of peer to peer borrowers have been individuals looking to pay off high-interest credit card debt.
Lending Club and Prosper work by using powerful algorithms and technology to efficiently enable investors to fund these loans. A single loan of $1,000 provided by Lending Club or Prosper to a borrower will be carved into investor notes of $25 increments. Theoretically, 40 different investors could fund that $1,000 loan to the tune of $25 each. On the investor side of the equation, a $10,000 account may be invested across 400 different notes of $25 each. Such diversification is important in managing risk.
To begin investing, an investor may establish an account with Lending Club or Prosper. Once the investor has transferred capital to their account, they may direct the investment capital into fractionalized loans available on the platform. Many investors have found this to be a powerful and reliable way to find yield in a low interest rate environment. If you choose to use a third-party investment manager such as NSR Invest, you can have the whole process handled by experts from start to finish.
This blog first appeared as part of our white paper, “The Rise of Marketplace Lending: Finding Yield in New Places.” Click here to download the full white paper.