Peer-to-peer lending has gained popularity over the past couple of years as disruptors like LendingClub and Prosper struggled to make waves and eventually partnered with banks to stay in business. One of the key reasons for P2P lending’s growing popularity is its ability to provide relatively low-risk lending to investors.
In addition to the low risk promised by P2P lending platforms, investors will also receive higher returns than they would through stable products like CDs. While this is exciting for a lot of investors who are looking to add diversification to their portfolio, there are still elements of risk that must be kept in mind before making a large investment. We’ll take a look at those elements and at where P2P lending stands today.
P2P Lending Rates
What sets P2P lending apart from other forms of lending is that it doesn’t require an intermediary between lenders and borrowers. This allows for lower interest rates, which is where platforms like LendingClub and Prosper make their money.
Instead of charging borrowers and taking a percentage of the loan, P2P platforms take a flat fee. This will often be between 5 and 7 percent of the loan. Some lenders will also pay a servicing fee, which is a percentage of the interest they have been paid to the platform.