How to Make Passive Income Lending Money To People
Updated: Mar 10, 2021
Peer-to-Peer lending platforms, like Prosper and Lendingclub, are a popular option these days among borrowers and investors alike. For borrowers, strict rules hold them back from acquiring financing from banks. On the flip side, peer-to-peer lending offers investors the potential for higher returns from a diversified pool of borrowers. For seasoned investors, giving loans to people like you and me also offers typically low stock market correlation. Lastly, it kinda feels good to deprive banks of some of their revenue and make easy money at the same time.
How It All Works
So how does investors make money from peer-to peer lending? The same way banks make money when they lend to their borrowers. You’ll charge interest to the borrowers with pre-determined interest rates on an annual basis. The P2P lending platforms like Prosper and LendingClub work as mediator between the borrowers and the investors. The concept of profit making with P2P lending platforms is similar to that of banks with the exception that these platforms are online only. Borrowers pay interest on their loans, the investor collects the interest as profits and the platform charges a fee to both parties.
Essentially you are making money by giving out loans to others. Unlike direct lending, you may not know your borrower personally. The lending platforms like Prosper and LendingClub bridge that gap for you as an investor. As the borrowers make monthly repayments on loans, these platforms return monthly interest to you.
Making Money With Prosper and LendingClub
Both Prosper and LendingClub offer similar investment options. The investment procedure is also similar, as both platforms work through their online and mobile apps. The three-step procedure to begin with these platforms is:
1. Sign up. Create an online account by providing all the relevant personal and investment details.
2. Select your investment options. Your investment returns will vary based on the loan amount, duration, but especially on how risky are the pool of borrowers you are lending out to. If a borrower has a bad credit score, the interest rate goes up. More risk, more reward. More on category loans below.
3. Get Paid. The borrowers make monthly payments to the lending platforms. You get paid on a monthly basis.
Investment Returns with Prosper
Prosper offers a weighted average annual return of 5.2% to its investors. The loans are divided into two categories depending on different risk-reward options.
Low-Risk Low-Reward Loans: These AA or B category loans are considered less risky and offer lower returns on investments. The historical returns range from 3.6%-6.6%
High-Risk High-Reward: These loans are the riskiest investments but offer higher returns on investments ranging from 3.4% to 9%.
Investment Returns with LendingClub
The LendingClub offers gross investment rates of 14% per annum. They charge a service fee of 1% and include principal and interest losses of 8%. Effectively making the return rates of 5% on average. The investment categories range A, B, C category loans with varying investment returns from 4% to 9%.
Benefits of Investments with Prosper and LendingClub
Both of these peer to peer lending platforms offer substantial investment returns for investors. Historical returns for both these platforms range about 5% annually. These platforms allow easy access through online and mobile application presence to all investors. The simple account set up and verification process doesn’t take long too. Other features include:
- Both Platforms offer higher investment returns than banks.
- You can start with a low minimum investment with only $25.
- You can diversify the investment risk by selecting different category loans.
- Both Platforms offer monthly investment returns.
- You can reinvest your returns automatically if you are looking for long-term capital gains and compound interest.
- The accessibility to these platforms is easy and doesn’t require technical analysis like Stocks and Forex market investments.
- You can invest as an individual or you can invest as a business.
- You can expect good monthly returns on your investment with these P2P platforms.
Risks of Investments with Prosper and LendingClub
Although both of these lending platforms are well established and offer great investment returns, both offer some risks too. As an investor, you should consider these risks before investing your money.
- The average annual returns are calculated on a historical basis and are not guaranteed.
- These are unsecured investments and are not insured by FDIC.
- The investment returns and pre-tax rates. Your tax implications may reduce your net returns.
- Macroeconomic risks and other business risks may result in the full loss of your investment.
For the less savvy investor looking for higher yields in this low-yield world, diversifying in peer-to-peer lending is a no brainer. However, the basic investment rule with these platforms is even more true than with traditional investments i.e. consider the risk-reward correlation. In other words, consider your risk appetite and risk tolerance before you select which investment you’ll make on these platforms. Macroeconomic conditions can make profitability a challenge if you lend to high risk borrowers.
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