Peer-to-peer lending: investment options and strategies that actually work

18 November 2016

Nowadays, when banking savings accounts do not offer as attractive returns as before, peer-to-peer investing is rapidly surging in popularity. Generally, in this case investor returns fall in a 6-12% range, and that makes automated P2P platforms a good choice for those looking to get a higher rate of return from their money and ready to try something new. In addition, compared to other fixed-income investment vehicles, crowdlending provides more ways to manage risk because you can personally decide which loans to approve and which ones to ignore. It’s similar to working as a loan officer in your own bank!

Peer-to-peer lending: a new investment opportunity

Peer-to-peer lending platforms are designed to connect individuals wishing to borrow money with potential investors. It works this way: a P2P website finds people that agree to lend money at a pre-agreed interest rate, pools it and issues a loan. The people who funded the loan receive interest and principal on a monthly basis. Since crowdlending businesses don’t have physical branches, they have lower operational costs and can offer more beneficial APRs to borrowers and higher annualized returns to investors. Here are some popular P2P platforms providing this kind of financial services:

Prosper Marketplace

Prosper, the pioneer of the P2P lending sector is the US, offers fixed-rate unsecured $2,000-$35,000 loans for tenure of 3-5 years for small businesses and individuals. The annual percentage rate varies from 5.99% (low default risk) to 36.00% (high default risk) basing on the credit check of the potential borrower.

Prosper Marketplace

To start investing, you need just $25, though it is recommended to invest at least $2,500 to properly diversify your portfolio. The average estimated return for investors is 7.35% ranging from 4.32% to 12.58% depending on risk factors. The annual investor fee is 1%. In addition, the website offers the Quick Invest feature that allows loan-givers to make investments automatically using the website’s filters.

Lending Club

Based in San Francisco (California), Lending Club is considered to be the largest crowdlending marketplace in the world aimed to transform the existing credit system. Basically, it offers three types of loans: personal loans ($1,000-$40,000), small business loans ($5,000-$300,000), and patient solutions (up to $50,000). According to the latest statistics, its annual percentage rate ranges from 7.14% to 26.47%.

The minimum investment amount is $25. You can either choose the Manual Investing option that supposes browsing the loans currently listed on the website and choosing the most suitable variants manually or the Automated Investing strategy – in this case, your orders will be placed automatically basing on the pre-set investment criteria. Lending Club’s average annualized returns range between 5% and 7%. The annual servicing fee for investors is 1%.


Founded in 2010 and regulated by the Financial Conduct Authority, RateSetter is one of the biggest crowdlending businesses on the UK market. It issues personal loans (up to £35,000), business loans (up to £2m), and property finance loans for professional property developers (£500k-£3.5m), from 3 months to 5 years.

Even though the minimum investment amount is just £10, the average amount lent by RateSetter investors is £21,531. As for the annualized returns, they vary from 2.8% (rolling market) to 4.1% (5 year market). In addition, the company allows investors to set their own interest rates – for example, if the actual rate is 5%, you can set it to 5.3% or 4.9% depending on the demand. RateSetter doesn’t charge any investor fees.

P2P investment tips to maximize your return

There is no “risk-free investment vehicle” – there is always some risk involved and defaults are going to happen. The most successful P2P investors can earn up to 20%, but there are always some unlucky people risking to lose most of their money – on average, the P2P loan default rate is 20%. Besides making a proper research (there are over 50 different crowdlending platforms available in the UK only), you need to read and educate yourself on the worst case scenarios and time-proven winning investment strategies.

If you want to significantly raise your chances of a good return on your cash, the first and most important thing to consider is diversification: spread your investment over several loans to limit the damage if one of them goes bad. For example, if you are planning to invest $2,500, consider investing $25 in 100 loans. You can also choose different loan durations, asset classes, risk grades, and even crowdlending websites to minimize possible losses.

P2P investment

Another rule is to invest slowly. Even if you are going to invest just a small amount, it doesn’t mean that you need to fund any available loan – set your custom website filters and take into consideration each loan individually. Check all the documentation and data that you can find. Don’t invest all your money at once – if you don’t find suitable offers, wait a few days until new offers are available instead of loosening your criteria. Of course, in this case the investment process may take several weeks, but in the end you will build a strong investment portfolio.

Another smart strategy is to re-invest your cash flow – don’t let your returns sit idle! Of course, it may be amazing to watch how your bank account is growing with compound interest, but P2P investing should not be passive – lots of idle cash will drag down your returns. Income-generating investments work best when the income they produce is re-invested in new loans. So as soon as your balance goes over $25, spend some time to find new loans to invest in.

P2P investing has become a useful alternative to classic savings and investing products offered by street-side businesses. In today’s low interest rate climate, they can provide a stable cash flow stream and solid returns. On the other hand, the P2P lending model also supposes some financially unstable borrowers and loan defaults, so spend some extra time to find out how you can lower risk and avoid newbie mistakes.

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