Ask An Advisor: What Do You Think About Peer-to-Peer Lending?

  • By Jocelyn Black Hodes, DailyWorth’s Resident Financial Advisor
  • June 13, 2013

Both platforms offer the option to browse individual cases and invest based on personal choice or the option to invest in a pre-selected, diversified group of loans based on desired level of risk. Some investors using both platforms claim to have gotten better returns through Prosper (where the minimum credit score for borrowers is 640) than Lending Club (where the minimum score is 660). 

P2P lending (at least through these two platforms) offers very tempting investing options. Who wouldn't want a steady rate of return of at least 6 percent net of fees--and much higher in some cases--and the satisfaction of helping your fellow (wo)man in need? They both also offer IRAs, but the minimum investment is $5,000 and the diversification, cost, risk and long-term growth potential are questionable compared to other IRA options through more traditional brokerages

Keep in mind that the higher return investing options with P2P do come with higher risk, and both and Lending Club charge a one-percent service fee to investors (for Lending Club it is charged to anything paid by the borrower and for it is charged to the annual borrowed balanced and is accrued daily) as well as fees for collection services in the event of payment delinquency. 

More importantly, not all states have approved this kind of investing yet, so if you live in Arizona or Pennsylvania, for example, you can't currently invest in P2P through these platforms (bummer, I know). And other states require that you have a minimum net worth and/or minimum annual income in order to invest this way. 

Bottom line: P2P investing is definitely a compelling and seemingly rewarding alternative to traditional investing. However, it requires extensive research to make sure that (A) you are even eligible to be an investor, (B) the risk and return potential are aligned with your investing goal and risk tolerance, and (C) you are investing in people you truly want to be supporting (and who have a high likelihood of paying back the loan).

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