5 Ways Peer-to-Peer Lending Creates ROI for Investors

Peer-to-peer lending is a relatively new concept that helps borrowers find great deals on loans. In order to finance these types of loans, peer-to-peer lending relies on individual investors who fund each loan in small amounts.

image

Source: Shutterstock

This method of lending is fast, efficient, and often lowers the cost of a loan for borrowers; at the same time, it provides a stable rate of return for investors.

Why does peer-to-peer lending offer a higher ROI compared to other investment methods? Let’s take a look at 5 compelling reasons why this form of lending is beneficial not just for borrowers but also for the investors who back these loans.

A Proven Model

Ever since Lending Club and Prosper were founded in the United States in 2006, the industry for peer-to-peer lending has been booming.

These stalwarts have been originating more loans than ever before. Here is the US market’s performance over time:

image

Source: Crowdfundinsider

Peer-to-peer lending is now producing over $500 million in loans per month through Lending Club. That’s impressive for an industry founded only eight years ago. It is clear that demand is on the rise and there are no sign of slowing down.

An Avenue for Specific Borrowing

Whether it’s paying down debt or financing bitcoin miners, peer-to-peer lending allows borrowers to obtain loans for things traditional lenders might be wary of.

According to Prosper, debt consolidation loans are one of the most popular peer-to-peer lending loans.

image

Source: CreditCards.com

For a bitcoin miner, trying to get a loan from a bank or other traditional lender would be very difficult unless the borrower could provide a specific business case for doing so.

The bottom line is that peer-to-peer lending allows individual investors to be creative in deciding what types of loans to fund for borrowers.

Spreading out the Risk

Those who invest in peer-to-peer loans are able to diversify, therefore, spreading out risk by funding many different loans.

It’s important to understand that borrowers sometimes don’t pay back loans, known as a default. It’s something that cannot be avoided in the peer-to-peer lending industry and even in regular banks. If investors diversify their investments through many different loans, overall investor risk can be reduced.

image

Source: LendingMemo

Data pulled from Lending Club shows that when investors diversify their funds through many different loans, they are able to obtain returns that are much better than a high yield savings account. Frequently, these peer-to-peer funds outperform mutual funds and other money management funds.

Helping Borrowers with Not So Perfect Credit

Many borrowers on peer-to-peer lending sites are looking for access to low interest rates while often not having a perfect credit score.

This is one of the reasons peer-to-peer lending has become so popular: it can be easier to get a loan on a peer-to-peer marketplace than going to a bank. For some borrowers, alternatives such as payday loans may levy interest rates at 15%+ p.m, plus fees.

image

Prosper credit scores in 2013. Source: Orchard

The average credit scores in the 660-670 range on Prosper’s lending marketplace constitute what credit scoring systems would consider “good” borrowers. This is in between the lower-end “fair” and the upper “excellent” tier of borrowers through the FICO scoring system.

Cheaper for Borrowers, Good for Investors

Large corporate banks are complex organizations. During the process of a loan approval, the loan goes through many different channels which leads to very high overhead in operating costs.  Banks have to comply with more regulations than peer-to-peer marketplaces, therefore, interest rates and overall APR can be extremely costly.

Banks pass the cost of running their banks onto borrowers in the form of pricey fees, high standards for loan approval, and long lead times.

image

Source: Foundation Capital

Peer-to-peer lending marketplaces are a faster and less expensive for everyone involved. The whole process is simpler in comparison to what the banking industry must do to lend people money. Due to the lending process being entirely online, peer-to-peer lending market places create an easy and user friendly way to apply for loans.

 

Where BTCJam Stands

BTCJam is a unique peer-to-peer lender in several different ways:

  • By utilizing our unique in-house credit scoring system, borrowers can instantly create a credit profile when they supply us with certain information. As they complete more of their profile, their credit score becomes more accurate and generally improves. A full profile also has the benefit of creating more trust for investors.
  • We are able to leverage the low costs of capital in the developed world with the high costs of borrowing in many countries. Because of this global advantage, we can return to investors a better rate of return and provide more affordable loans for people in developing countries.
  • Because we use the digital currency bitcoin as a transaction protocol, we can connect borrowers and investors globally – a borrower can convert a loan and investors can convert their profit into local currency whenever necessary.

These factors are key reasons why we are able to provide investors great returns.

Here’s how to learn more about investing in bitcoin loans on BTCJam’s marketplace.

 

Introducing APR, Expected Loss, and Expected APR

We are very proud to introduce an important new feature for investors: Expected APR. With this new feature, you will be able to have a better estimate of how much you will earn with your investment. In the browse listings page, you can now filter by the expected APR, and on the specific listing page you can view the effective APR and estimated loss.

image

What is APR?

APR (Annual Percentage Rate) tells you how much your bitcoin will grow at an annualized rate when invested in a loan. For a 1 month loan, imagine re-investing the Bitcoin you got back in another loan with the exact same terms 12x over the period of 1 year. It is a standardized computation that provides the bottom-line number that reflects how much an Investor can gain.

What is Expected Loss?
BTCJam calculates the probability of loss determined by historical repayment rates, the borrowers information, and repayment behavior on BTCJam.

What is Expected APR?
APR – Expected Loss = Expected APR
This calculation is the expected gain determined by the APR minus the Expected Loss. This is the estimate of how much you will gain.

For example, a loan of a $100 has:

APR: 8.20%

Expected Loss: 0.11%

Expected APR: 8.09%

And you invested the Bitcoin equivalent of $10.

The APR is 8.20% so you could grow your bitcoins to the equivalent of $10.82 with an Expected Loss of $0.01.

If you invest a total amount of $10,000 with each invesement at $10 in 1000 of loans with those exact numbers, it is expected that 1 defaults (1000×0.11 ≈ 1), so you lose 1 and 999 loans grow with 8.2% a year. 999x10x1.082 = $10,809.18.

Now, your effective return is ($10,809.18-$10,000)/$10,000 = 8.09% which matches your expected APR. Be aware that the expected APR is based on the historical performance of BTCJam’s repayment rates and that your actual performance may vary.

Remember, having a diversified portfolio significantly lowers the risk of your investments! Learn more about diversifying here.

Excited? Check our newest listings!