The basic premise of p2p lending is this: people sign up on either Lending Club or Prosper as a borrower or an investor. A borrower submits an application for a loan, and if approved the loan is placed on the website for investors to fund. Investors typically invest in a small portion of many different loans, thereby spreading their risk.
Borrowers
A borrower’s loan will remain on the web site for a short amount of time, up to two weeks. During that time investors can ask the borrower questions in order to decide whether or not to invest in the loan. While no personal information is displayed, information from the borrower’s credit report is provided for the investors, many of who screen these loans based on different criteria.
A number of things can happen while the loan is being funded:
- The loan can be pulled off the platform because it fails some part of the verification process.
- The loan can become fully funded, in which case it is taken off the platform and the borrower will receive their money less an origination fee (detailed in the table on the next page).
- The borrower may cancel their loan and delete it from the platform.
- The loan fails to obtain funding after 14 days. Although if investors fund only part of the loan it can still be issued if it funds above a certain percentage.
Investors
From an investor perspective, peer to peer lending allows you to directly invest in other people, thereby completely bypassing the banking system. Investors simply sign-up at Lending Club or Prosper, link to their bank account and then transfer money in.
Typically, there will be hundreds of loans to choose from for investors. Both Lending Club and Prosper allow investors an easy way to invest by providing automated plans. Prosper provides several different automated plans based on credit risk or you can build a customized plan based on your own selection criteria. Lending Club provides you with three automated options (low, medium and high risk), or you can use their slider tool to choose an average interest rate.
Then you just choose the total amount you want to invest and your money will be allocated automatically among many different loans.The other alternative for investors is to choose loans individually. You can use the filters that. Lending Club and Prosper provide, and then browse through each loan one by one. While this method is more time consuming, many successful investors will only invest this way.
Who Can Invest Money?
Investing with both Lending Club and Prosper is much more restrictive than borrowing. Only about half the states allow investors to open a peer to peer lending investment account. Prosper allows investors in the following 33 states: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
Lending Club allows investors in the following 36 states: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Illinois, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Montana, Nebraska, New Hampshire, Nevada, New York, Oklahoma, Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
However, even if you reside in these states Lending Club imposes additional criteria on all investors. To be eligible, an investor must have an annual gross income of at least $70,000 and a net worth of at least $70,000, or just a net worth of more than $250,000. There are different requirements for California and Kentucky residents explained on Lending Club’s website.
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