Peer-to-peer (P2P) lending, also known as marketplace lending, offers a way to generate passive income by acting as a lender to individuals seeking personal loans.
For beginners, it provides an alternative asset class that is disconnected from the stock market and can generate returns often higher than traditional savings accounts or bonds.
The P2P market is dominated by two long-standing platforms: Prosper and LendingClub. While both platforms connect borrowers and investors, they have different track records, investment features, and minimum investment requirements.
Here is a comparison of the best P2P lending platforms for beginners, focusing on ease of use, risk management, and potential returns.
How Peer-to-Peer Lending Works
Before choosing a platform, it’s important to understand the mechanics:
- The Loan: A borrower applies for a personal loan (e.g., to consolidate debt, pay for a wedding, or cover medical expenses) on the platform.
- The Rating: The platform assigns a risk grade (e.g., A, B, C, D) based on the borrower’s credit profile.
- The Investment: As an investor, you typically invest a small amount (often $\$25$) into many different loans. You are buying a fraction of that loan.
- The Return: The borrower repays the loan principal and interest to the platform, which then distributes the payments back to the investors.
The Key Risk: The primary risk is default (the borrower stops paying). This is why diversification—spreading your money across dozens or hundreds of loans—is crucial.
Platform Comparison for Beginner Investors
| Feature | Prosper | LendingClub (Note: Now mostly focused on institutional investing) | Winner (For Beginner P2P Investing) |
| Minimum Investment | $25 per note (loan fraction) | $25 per note (loan fraction) | Tie |
| Historical Average Return | Historically ranges from 5% to 8% (net of fees and losses). | Historically similar to Prosper's range. | Tie |
| Investment Tool | Automated Investing: The platform’s tool selects loans based on your risk profile. | Fractional Shares: The platform now offers more exposure through fractional shares in funds. | Prosper (More straightforward P2P focus) |
| Fees | Annual Servicing Fee: 1% of the outstanding loan balance. | Varies based on investment vehicle, often lower for larger, institutional accounts. | Prosper (Clearer fee structure for small investors) |
| Secondary Market | No active secondary market for notes. | Used to have a secondary market, but less active now. | N/A (Liquidity is limited on both) |
Prosper: Best for Simple Automation
Prosper is the more straightforward choice for a beginner seeking simple P2P exposure.
- Ease of Use: Prosper's interface is clean and their Automated Investing tool is easy to set up. You choose how aggressive or conservative you want to be, and the algorithm instantly invests your funds into diversified loans that fit your criteria.
- Liquidity: The main drawback for Prosper is that there is no active secondary market. This means once you invest in a loan, your money is tied up for the full term (typically 3 or 5 years) unless the borrower prepays.
LendingClub: Evolving Focus
LendingClub pioneered P2P lending, but it has transitioned into a chartered bank that focuses more on providing loans and less on serving small, individual investors. While you can still participate, the investment structure is often geared toward fractional shares of an investment fund, which can be less direct than Prosper's loan notes.
The Beginner’s P2P Investment Strategy
To be successful and manage risk in P2P lending, beginners should follow two rules:
1. Diversification is Mandatory
The only way to absorb the inevitable defaults that occur with P2P lending is through massive diversification.
- Minimum Target: Allocate a maximum of $25 to $50 per loan and invest in at least 100 different loan notes. For example, if you have $2,500 to invest, put $25 into 100 different loans.
- Risk Grading: Don't just invest in the highest-risk (D, E, F grades) loans for the highest interest. Allocate the bulk of your funds (e.g., 70% of capital) to the safer A, B, and C-rated loans, which have lower default rates.
2. Start Small and Treat It as Alternative Income
P2P lending should be considered a small part of a diversified portfolio (e.g., no more than 5% of your total investable assets). Start with a small amount of capital you are comfortable losing, wait 6–12 months to see the actual default rate and net return on your loans, and then decide if you want to scale up your investment.
Conclusion: For beginners looking for a simple, automated entry into the P2P space, Prosper's clear platform and automated investing tools make it the most accessible place to start.
