While much of the growth in P2P lending (over $5B in loan volume in 2014 alone!) has been driven by borrowers looking for appealing alternatives to traditional banks and financial institutions like credit card companies, the growth has only been possible because of the matching investor demand. After all, from the investor’s perspective, P2P loan investing is little more than an opportunity to lend money to other individuals and earn an interest rate yield, not unlike any other "bond" investment. Except in a world where Treasury Bonds and intermediate Corporate bonds or CDs may yield little more than 1% to 2%, the P2P loan has a starting yield of 5.3% for “high-quality” notes and an average rate of over 13%!
Of course, the significant caveat with Peer-to-Peer investing is that some loans will default, even over their relatively limited three to five year terms, and thus the final net returns will be substantively lower than the top-line interest rate suggests. After all, P2P loans are unsecured personal loans, often to people who have credit issues in the first place (and thus why they seek out loans with interest rates of 5.3% to almost 30%!).
Nonetheless, the rise of P2P platforms makes it feasible for investors to extensively diversify across hundreds of Peer-to-Peer lending notes by investing into fractional loan shares, managed by technology that facilitates the process of routing a borrower’s loan payments out to what might be dozens or hundreds of investors who each contributed incrementally to the loan.
In fact, the growth of the P2P marketplace, along with the introduction of institutions, is beginning to create the potential for advisors and their clients to access P2P loans, as a unique form of ‘alternative’ fixed income asset class with appealing yields. On the other hand, the growth of institutional buyers may also be pushing available investor yields down, making it harder for individual investors to compete... which is even more troubling given that P2P loans have enjoyed record net returns on the back of an economic expansion, but face the prospective risk that forward returns could be far lower if/when the next recession arrives!