Factors to Consider When Investing in Online Alternative Lending Platforms

LendIt-Blog-Image

[Editor’s note: This is a guest post from LoanMe. LoanMe is a Silver sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco.]

Considering investing in an online alternative lending platform? Then you’re likely already aware they offer multiple opportunities to fund businesses and individuals who otherwise wouldn’t get the help they need. You may also know that the investment portfolios of online alternative lending platforms have grown 175 percent yearly over the last few years. When compared to the 3 percent for traditional banking loans, this becomes even more significant. While it’s a worthy cause to assist these companies and people, you still want to gain the highest returns possible with the lowest risk to your investments. This means you need a strategy. Here is a quick summary along with certain factors to be mindful of that can help you choose the right online alternative lending platform.

About Online Alternative Lending Platforms

Also known as peer-to-peer (P2P) lending companies, online alternative lending platforms seek investors like you to match small businesses and individuals with the funds they need. Essentially, you become the lender and gain the profit from the interest. Although P2P platforms may cater to higher-risk individuals and businesses, their higher interest rates and shorter payback times (as compared to traditional loans) can help increase your profits anywhere from 30 to 120 percent over other lending investments. P2P solutions offer the advantages of choosing how and to whom you invest your money, while still maintaining the ability to automate your financial decisions.

Terms, Types and More

P2P lending companies thrive on offering loans in varying amounts to meet emergency needs, planned needs, startup costs and operating costs. They also cater to both short and longer-term loan needs, so there’s a plethora of opportunity for your investments in both the short and long term.

To increase your ROI, look for P2P lending companies that allow you to choose from a variety of:

  1. Terms: Most P2P lenders limit the length of the loan term to 3-5 years.
  2. Types of Borrowers Serviced: Including prime and less-than-prime unsecured customers, and small business loans provide more opportunities for investments.
  3. Servicing: Look at P2P lenders that handle servicing in-house for higher returns.

Other factors to consider when considering investing in a P2P are:

  1. Bank Charter vs State Licensed: Most lenders operate under a bank charter model, which has come under scrutiny from regulatory agencies.
  2. Balance Sheet Lending: Balance sheet P2P lending platforms carry their own risk and act as a “first loss” buffer for investors. Unlike other P2P lenders that do not have their own investment in the company portfolio, balance sheet P2P lenders are invested in success. This allows them to raise more capital. It also helps protect you from unnecessary losses because rather than signing off to another institution that sets the fees, they underwrite the funds used. Using a balance sheet P2P lending company offers transparency and maximum returns.

Management Experience

There has been a multitude of P2P lending platforms popping up in recent years. To avoid a fly-by-night operation that’s not anything more than a fancy website, get to know the P2P lender and its management team. Ask about the management qualities that have helped them succeed. A P2P lender with exceptional management experience may benefit you as the investor. As a financial matchmaker between you and borrowers, they can provide key skills and information to help in the evaluation process. They’re also versatile and can manage your money as if it were their own.

Sources:

http://www.businessinsider.com/how-to-choose-the-best-peer-to-peer-lending-site-2011-3
http://www.financemagnates.com/fintech/bloggers/p2p-and-balance-sheet-lending-same-same-but-different/
http://www.forbes.com/sites/hbsworkingknowledge/2014/09/23/alternative-online-lenders-fill-funding-needs-for-small-businesses/#786f6cd84223
http://thelendingmag.com/peer-to-peer-lending/

*LoanMe is not a P2P lender, but we offer an alternative way to invest in consumer and small business installment loans. Visit us at www.loanme.com

The host of this blog, LendIt, is the largest conference series dedicated to connecting the global online lending community. Our conferences bring together the leading lending platforms, investors, and service providers in our industry for unparalleled educational, networking, and business development opportunities. LendIt hosts three conferences annually: our flagship conference LendIt USA as well as LendIt Europe in London and LendIt China in Shanghai. Visit our home page to register for the next event and to subscribe to our newsletter.

Leave a Reply

Your email address will not be published. Required fields are marked *