It looks like the sluggish economic start to 2016 is finally taking its toll on the peer-to-peer lending marketplace.
Rate hikes from Prosper, Lending Club
Early last week, Prosper announced it will raise its rates by an average 1.4% on borrowers, according to the Wall Street Journal. That means the average interest rate on their online consumer loans will climb from 13.5% to 14.9%. (The headline interest rate for a small sliver of borrowers with top-drawer credit is currently 5.99%.)
Prosper’s announcement about increased rates follows a December move by competitor Lending Club to raise its rates across all loans by 0.25%. A further rate hike in January raised rates on select Lending Club loans by .67%.
Both lenders are responding to increased economic turmoil — namely, the stock market slump triggered by the falling price of oil and fears about slowing economic growth in China — and the risk posed by borrowers who can’t honor their debt obligations. The maximum personal loan one can get through a peer-to-peer site currently is $35,000.
So higher monthly payments are certainly in store for future borrowers. But so too are bigger payouts for investors. The very nature of the peer-to-peer business model is that companies like Prosper and Lending Club don’t hold loans in portfolio.
The peer-to-peer marketplace got its start with individual investors who were willing to put up money to lend to others online as an alternative to traditional bank lending. Individual lenders protect their interests by buying little tiny slices and dices of multiple loans, instead of pouring all their dough into one big loan. That way if any one given borrower defaults, an individual lender only loses a fraction of his or her money, not the whole amount.
Today, however, the marketplace has moved away from individuals as investors and become the province of bigger entities. A whopping 92% of its loan portfolio was owned by big institutions and hedge funds during the first nine months of 2015, according to the Wall Street Journal.
But with that move away from the little guy as investor, the returns have gone down too. While peer-to-peer lenders made $12 billion in loans in 2015, the average return was 6.7% — the lowest its been since 2011.
Crowdfunding takes peer-to-peer to the next level
Now the basic idea of peer-to-peer lending is undergoing a change. Some newer sites are doing what’s called crowdfunding. With crowdfunding, a borrower only gets the money if enough people agree to put up little chunks. If you don’t get 100% funding for a potential project, you get no money at all.
One of the most prominent crowdfunding sites is Kickstarter.com. While someone might lend money on a traditional peer-to-peer site to earn a nice return on investment, that’s typically not the motivation for people lending money on a site like Kickstarter. The Kickstarter user is more apt to just want to help entrepreneurs or creative types realize an idea.
Another crowdfunding site is Kiva.com, which allows people to fund loans to entrepreneurs in $25 increments or higher. Again, people don’t do this to earn interest. All you do is help entrepreneurs — many of them women struggling to get out of poverty in Third World countries — get started.
If you have an entrepreneurial idea and the bank has no interest in you or your idea, check these things out. There may be money out there to make your idea come alive!
Read more: Are you eligible for this $6,242 tax credit?