ApyGuy: Maximize Your Savings & Earnings

Peer to Peer Lending

12 Lucrative Alternatives To CDs and Savings Accounts


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Every investor wants to earn a reasonable rate of return. 

Your rate of return can produce an income to pay for living expenses, or funds can be reinvested to increase your investment portfolio.

The current interest rate environment makes it difficult to earn a decent return on traditional deposit accounts.

Interest Rate Landscape

Interest rates have steadily declined since the early 1980’s when they were at their highest point in modern history. According to NerdWallet and the Federal Reserve Bank of St. Louis, a 3 month CD in December of 1980 would have earned you a whopping 18.65% APY.

Today, however, you’d be hard-pressed to find a yield even one-tenth that size. And you’d have to lock up your funds for many years to even come close.

Since the onset of COVID-19 and the subsequent recession, the interest rate environment for savers has gotten even worse. The Federal Reserve System chairman Jerome Powell has made it clear they intend to hold key rates at historically low levels for an extended period of time. And thanks to low rates of inflation, the Fed will likely be able to keep its promise.

That being said, many savers that have historically relied on FDIC-insured investment vehicles for their savings and investments are now searching for safe alternatives that feature higher returns.

Below is our breakdown of the most worthy alternatives to traditional CDs and savings accounts.

Have you considered the following?

Paying off High Interest Debt

Reducing debt can generate an attractive rate of return.

You can earn a higher rate of return by paying off debt that carries a high rate of interest.

If the rate of interest you remove is higher than the rates available on CDs and saving accounts, you’re financially better off.

The average interest rate on credit card debt is over 21%, and interest rates on student loans average between 4.5% and 7.6%, depending on the type of loan.

Here’s a simple example, assuming that the investor pays off the highest interest rate debt first.

  • You pay off a $3,000 credit card balance with a 20% annual interest rate, saving you $600 interest expense. You now have $600 available to use toward another debt.
  • Next, you apply the $600 in saved credit card interest and $4,400 additional dollars to pay off $5,000 in student debt. This debit has a 6% annual interest rate, saving you $300 in interest. 
  • Finally, you apply the $300 in saved student loan interest and $1,700 additional dollars to pay off $2,000 in additional student debt. This debit has a 4.5% annual interest rate, saving you $90 in interest. 

The result? You invested $9,100 to pay down debt, and saved $990 in interest costs. Your return, in terms of interest costs eliminated, is over 10%. This is a much higher return than rates for CDs and savings accounts.

A growing number of investors are considering the returns from peer-to-peer lending.

Peer to Peer Lending

Peer to peer lending provides an alternative to traditional bank loans, and offers a competitive rate of return to investors.

With peer-to-peer (P2P) lending, borrowers are connected with lenders through an online marketplace, with the P2P company serving as a facilitator.

The borrower doesn’t have to go through a lengthy loan approval process. The application process is simplified, and decisions are made quickly. The lender earns a return, based on a share of the interest rate charged to the borrower.

Companies such as Upstart and Funding Circle facilitate personal and business loans. PriceWaterhouseCoopers estimates that the market could reach $150 billion or higher by 2025.

As an example, Upstart states that the average 3-year loan has an annual percentage rate of 20%, and that over 478,000 loans have originated on the site. P2P lenders can earn annual returns from 6 to 10%. 

These are unsecured loans, and there is a risk of default by a borrower. Upstart’s default rate is between 4% and 9%. Fortunately, you can spread your risk by investing a small dollar amount in a number of different loans.

Both the SEC and state entities regulate P2P lenders.

ETF And Dividend Stocks

Over the long term, common stocks have offered higher returns than CD and savings accounts.

One way to measure the average return on common stocks is to use the Standard and Poor’s (S&P) 500 Index. This is an index that tracks the investment performance of 500 large company stocks.

The average annual return for the index from 1957 through 2018 is roughly 8% (7.96%). While the average return is higher, the year-to-year volatility creates risk for investors. The index generated a 34% increase in 1995, and a 38% decline in 2008. 

Common stocks can be a successful investment for individuals who hold a portfolio of stocks over the long term. 

An exchange-traded fund (ETF) is a portfolio of stocks that tracks the performance of an underlying index, such as the S&P 500 Index. ETFs are listed on exchanges, and their shares are traded each business day. Purchasing an ETF is an inexpensive way to invest in a diversified portfolio of stocks.

You can reduce stock market volatility by purchasing dividend stocks. These stocks pay a high dividend, as compared to the overall stock market. Typically, high-dividend stocks represent companies that are well established, and produce consistent profits.

Assuming dividend reinvestment, high-dividend stocks posted compound annual returns of 11.7% between 1986 and 2016. According to Ned Davis Research, dividend stocks posted an average annual return of 10.07% between 1972 and 2013.

Stock investors are exposed to volatility, as explained earlier. By reinvesting a high dollar amount of dividends, investors can benefit from compounding interest, or the ability to earn a return on prior dividend payments.

Compounding interest increases returns, and reduces the impact of stock price declines on the annual rate of return. ETFs and high-dividend stocks are appropriate for investors who are willing to take a moderate level of risk to earn higher returns.

Corporate, Municipal, and Government Bonds

A bond is a debt instrument that pays an investor a fixed interest rate each year, and returns the original (principal) amount when the bond reaches maturity. Many investors use bonds to earn a predictable amount of income each year.

Most bonds receive a credit rating, based on their ability to make all required interest payments and repay the investor’s principal amount at maturity. 

A default means that the bond missed an interest payment, principal repayment, or both. Investors should consider the bond rating for every investment, in order to minimize the risk of a bond default. 

Standard and Poor’s and other institutions analyze bonds and provide a bond rating. 

Investors can purchase several types of bonds:

Corporate Bonds

Debt issued by corporations to raise capital. Companies that generate consistent profits and limit the total debt can make all required debt payments. These firms typically receive a higher bond rating than other businesses with inconsistent profits.

Municipal bonds

States, cities, and local governments issue municipal bonds. The bond may be secured by the taxing power of the municipality (general obligation bonds), or funded by a specific revenue source.

Government bonds

The US federal government issues Treasury bonds. These bonds are backed by the full faith and credit of the US, and have the highest bond rating for creditworthiness.

Barclays Capital reports that bonds earned an average annual return of 4.3% from 1915 to 2014. Keep in mind, however, that inflation reduces the purchasing power of the income paid on a bond. Inflation averaged 3.2% during the same time period, meaning that the average “real” return was (4.3% – 3.2%), or 1.1%

CD and savings account investors are also subject to inflation and reduced purchasing power. So, it’s useful to compare CD and savings rates to the 4.3% annual return on bonds.

Real Estate Investing, REITS

With REITs you can invest in a diversified portfolio of properties or property management companies. The average 20 year return on a REIT is 11.8%.

Investors can diversify their investment portfolios and earn competitive rates of return by investing in real estate. 

Investopedia explains that the average 20-year return in commercial real estate is 9.5%, while residential real estate averages 10.6%.

  • Purchasing individual properties is complicated, and carries several forms of risk. You need to understand current prices in the market, so that you can negotiate a reasonable purchase price. 
  • You’ll need an expert who can ensure that the title of the property is legally transferred to you. 
  • If you want to build or make changes to an existing structure, you’ll need to get permits and follow local building code regulations.

Real estate investment trusts (REITS) allow you to invest in a portfolio of securities, and avoid the challenges of purchasing individual properties.

Like stocks and mutual funds, REITS are securities, and they trade on exchanges. You can invest in a diversified portfolio of properties, and invest in property management companies.

Kiplinger lists SITE Centers (shopping centers) and Boston Properties (commercial property) as two of the best REITs for investors.

The average 20-year return for a REIT is 11.8%.

Rewards Checking

If you’ve used credit cards and received rewards, you might consider a rewards checking account. You can potentially earn high interest rates, cash back rewards, and even signup bonuses.

Reward checking interest rates may be higher than what you’re currently earning in a checking or savings account. These accounts offer free checking, and many will refund ATM fees.

There are some drawbacks to rewards checking accounts, however.

  • Debit card usage: The most common requirement is that the owner must use the account debit card a minimum number of times each month (10 times is typical). If you don’t meet the usage requirement, you’ll earn less interest.
  • Types of debit card purchases: Some accounts may also require debit card purchases for a minimum dollar amount. You may not be able to meet the minimum usage requirement with a number of small purchases.
  • Balance caps: The bank may cap the dollar amount that you can use to earn the higher interest rate. Read the agreement details carefully to determine if there is a cap.

If you’re self-disciplined and monitor your debit card usage and balance, you can earn a higher return with rewards checking.

Foreign Currency CDs

These CDs can offer a higher rate of return, but investors are exposed to currency risk while their deposits are active.

The risk with foreign currency CDs is currency depreciation against the US dollar while your funds are deposited.

When the investor converts back to dollars, the owner is exposed to the currency fluctuation that took place during the tenure of his/her deposit. If the US dollar’s value has strengthened compared to the other currency, the investor will get back fewer dollars when the CD matures. Conversely, if the US dollar has weakened compared to the other currency, the investor will get back more dollars when the CD matures.

Many traditional banks do not offer these products. TIAA Bank (formerly EverBank) is the most well known institution serving the space. They have two products – WorldCurrency CDs and WorldCurrency Baskets. You can choose from a number of currencies in both developed and emerging countries. The World Currency Baskets let you diversify into a number of currencies. You can read more in our rundown of foreign currency CDs.

Home Improvements / Rent Property as Airbnb

Earn a rate of return on an asset that you already own.

Upgrade your home- particularly if you own a second home- and rent your property as an Airbnb.

Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in that locale. It currently covers more than 81,000 cities and 191 countries worldwide.

The company is the largest home-sharing platform in the U.S., with more than two million people on average booked every night into its listings worldwide.

Many people earn income from Airbnb, particularly if they upgrade their homes to make them more attractive to a potential renter. You can make small improvements in your kitchen, or a spare bedroom, and post photos and a video of your home on Airbnb.

The risk for Airbnb hosts is that a renter may do damage to your home. However, Airbnb’s Host Guarantee program provides protection for up to $1,000,000 in damages to covered property in the rare event of guest damage, in eligible countries.

If you travel or have a second home, you can use the time away as an opportunity to rent your home and earn income.

Use start-ups like AirDNA to estimate how much your rental property could generate in Airbnb income. Research average nightly rates plus expected vacancy rates to get an estimated monthly income report for your property.

Diversified Portfolio of Growth Stocks

Growth stocks offer a potentially higher rate of return than the broad market, with a higher level of risk. A growth mutual fund may be an option for a small percentage of your investment portfolio.

The Motley Fool explains that: “Growth stocks prioritize going from small, up-and-coming businesses to leaders in their respective industries as quickly as possible. Early on, growth stocks tend to concentrate on building up their revenue, often at the cost of delaying profitability until a future date. After a period of time, growth stocks start focusing more on maximizing profit.”

Growth stocks may not produce consistent earnings, and these firms typically reinvest available earnings into the company. In most cases, growth stocks do not pay a dividend, which means that your return is generated from an increase in the stock price.

As mentioned earlier, average annual return for the S&P 500 stocks from 1957 through 2018 is roughly 8% (7.96%). While the average return is higher, the year-to-year volatility creates risk for investors. 

You can purchase a growth mutual fund that invests in dozens (or hundreds) of stocks. If a particular growth stock declines sharply in price, the impact on your portfolio is minimized.

Add Capital To Existing Business

Consider investing in yourself.

If you own and operate a successful business, you can invest additional capital. Maybe you use the added capital to fund a marketing campaign for a new product, or to buy inventory to meet seasonal demand.

A company that generates a 10% profit can use additional capital and generate a similar return. You know your business better than anyone else, and you can use the invested capital where your firm needs it the most.

Home Addition To Increase Value

If the owner has a smaller home in a highly desirable location and is considering a home sale, an addition could sharply increase the potential sale price of the home. The gain on sale may be far more than the cost of the home addition.

As mentioned above, the average annual return on residential real estate is 10.6%.  However, making right changes to your home can differentiate your property from others in the neighborhood. Talk with a realtor about an addition or remodeling project, and take advantage of your home’s location.

Private Equity Investing

If you have a high net worth, and can keep dollars invested for at least 4-5 years, private equity investing is an option for you.

Private equity funds invest in private companies that do not trade on an exchange. The fund managers work to make changes and increase the sales and profits of the purchased company. In most cases, the private equity fund attempts to sell the company for a gain after 6-10 years.

You must meet net worth minimums and other requirements before you can invest in a private equity fund. The fund also requires investors to keep funds invested for 4-5 years, so that the funds can be used to improve the company’s performance.

Private equity investing offers higher returns, with a higher level of risk. In some cases, the purchased businesses cannot be sold for a gain, or generate a loss for the fund.

Investing Options to Avoid

If you’re looking for higher rates of return, avoid these three types of investments.

Annuities

An annuity is an investment that pays a fixed stream of payments to an investor over time. Retirees use annuities that pay an income for a fixed number of years, or for the remaining life of the investor. Variable annuities allow purchasers to invest in stock and bond portfolios.

Annuities are complex, and the fees can be expensive. Many annuity investors do not understand the investment, and the fees charged reduce the rate of return.

Stock Options

Options are an investment tool that allows the buyer to speculate on the increase or decrease in the future price of a stock. Option prices are highly volatile, and some options expose the investor to an unlimited amount of risk. 

Commodity Trading

Commodities are materials or agricultural products that trade on exchanges. Commodities can change rapidly in price, based on weather, crop production, and world events. Like stock options, this investment exposes the investor to a large level of risk.

Next Steps

Talk with a financial advisor, and do your homework. Consider the potential risks and rewards for each investment alternative. If you diversify your investments, you can earn a higher return than rates on Bank CDs and savings accounts.

Complete Guide to Peer to Peer Lending [As Investor & Borrower]


Peer to Peer platforms connect borrowers with investors seeking higher rates of return.

The current interest rate environment makes it difficult for investors to earn a reasonable rate of return. Income investors, such as retirees, need earnings to pay for living expenses, and producing a sufficient level of income is a challenge.

Investment rates of return at traditional lending institutions are near historical lows. Savings accounts, checking accounts, and certificates of deposit rates may not be attractive to you.

A growing number of investors and savers are considering peer-to-peer platforms as a viable alternative to traditional savings accounts or deposits.

Peer-to-peer (P2P) lending is an investment vehicle that can produce higher rates of return for investors who are willing to accept a higher level of risk. This comprehensive guide explains P2P lending, and the pros and cons for investors and borrowers. 

This guide also reviews the top eight P2P platforms, along with the advantages and drawbacks of these institutions.

P2P lending was started to provide borrowers an alternative to traditional banks. P2P platforms connect people who need to borrow with investors who are seeking higher rates of return. P2P firms use data analytics to assess the creditworthiness of investors, and to monitor the risk of borrower defaults.

In 2005, Zopa, Ltd. started P2P lending in the UK, and Prosper Marketplace started operations in the US. In 2008, the Securities and Exchange Commission (SEC) required P2P lenders to submit to oversight rules. The SEC determined that the P2P lenders were selling unregistered investment securities, and required more regulation. 

Today, P2P firms must provide an SEC registered prospectus to each investor.

Loan originations reached $36 billion in 2015, but the industry started to experience larger than expected loan default rates. In 2016, the US Treasury called for increased oversight of P2P lending after LendingClub asked its CEO and other senior managers to resign for poor management practices.

Both investors and borrowers need to understand the basics of P2P lending before opening an account.

How Does P2P Lending Work?

Here is the process a borrower can use to apply for and repay a P2P loan:

  • Apply: Create a login on the P2P platform, and enter the information requested to apply for a loan. Most sites use your Social Security number to determine the interest rate and dollar amount of your loan. This step does not impact your credit history.
  • Finalize the loan: If you choose to accept the terms of the loan, you’ll need to provide more information, including data to verify your employment. Borrowers pay an origination fee when the loan is closed, and the fee is added to the balance of your loan.
  • Loan payments: You make monthly payments through the P2P platform, and each payment includes principal and interest.

If you want to invest through a P2P platform, follow these steps:

  • Apply: In most cases, investors in P2P platforms must meet the requirements to be accredited investors. The P2P platform will ask about your net worth, annual income, and investment experience before you’re allowed to invest.
  • Invest: Investors deposit funds and purchase notes, which include a portion of a number of individual loans. You can choose the types of loans you prefer, based on the projection interest rate paid and the credit risk of the borrowers. 
  • Diversify your portfolio: Loans that are rated as a higher credit risk pay higher interest rates to investors. To reduce the risk of an individual borrower defaulting on a loan, you can spread your investment dollars among dozens (or hundreds) of individual loans. 
  • Withdraw funds to reinvest: As you earn interest, you can choose to reinvest your earnings in more loans, or withdraw funds.

This form of lending provides an alternative to traditional bank loans, and offers a competitive rate of return to investors. With peer-to-peer (P2P) lending, borrowers are connected with lenders through an online marketplace, with the P2P company serving as a facilitator. P2P firms earn loan origination and servicing fees.

The borrower doesn’t have to go through a lengthy loan approval process. Instead, the application process is simplified, and decisions are made quickly. The investor earns a return, based on a share of the interest rate charged to the borrower.

Companies such as Upstart and Funding Circle facilitate personal and business loans. PriceWaterhouseCoopers estimates that the market could reach $150 billion or higher by 2025.

These are unsecured loans, and there is a risk of default by a borrower. Fortunately, you can spread your risk by investing a small dollar amount in a number of different loans. Both the SEC and state entities regulate P2P lenders.

To start investing, the investor opens an account on a P2P website and deposits funds. These funds then get dispersed out to a number of borrowers determined by the investor and the platform.

What to Expect as an Investor + Pros and Cons

Both individual investors and institutions loan funds to P2P borrowers. Finder explains that the institutional investors, such as hedge funds, are now providing a large amount of funding to P2P firms. These institutions are seeking higher rates of returns than they can earn on traditional investments.

The risk of loan default is the primary concern for P2P investors. Investopedia reports that Zopa had a default rate of 4.52% for loans granted in 2017, according to the Financial Times.

The P2P platforms discussed below each report on their default rates, and you’ll find average default rates of 2% to 8%. For example, Upstart’s default rate is between 4% and 9%.

Here are the pros and cons of investing in P2P loans:

Pros

  • P2P investors earn better than average rates of return
  • Investors help real people overcome financial obstacles

Cons

  • P2P investing presents a higher level of risk than bank deposit or savings account, due to the risk of loan default
  • A growing percentage of P2P investors are institutions, leaving less options for retail investors who want to invest in P2P

Borrowers may want a loan for business purposes, or for personal reasons. Many consumers borrow funds to pay off higher interest rate credit cards, to finance a home improvement project, or to buy a car. How does the process work?

What to Expect as a Borrower + Pros and Cons

Borrowers with a high credit rating can expect to pay interest rates below 10%, while higher risk borrowers may pay 20% to 30% annual interest rates. Dozens of individual investors may purchase a portion of your loan. 

Once approved, you can get your P2P funds within a week. You’ll make payments through the P2P platform monthly, and your payments include interest and repayment of principal.

Here are the pros and cons of borrowing on P2P platforms

Pros

  • Borrowers with lower credit scores can find access to credit 
  • Once approved, you can receive funds within a week 

Cons 

  • The interest rate charged may be much higher than rates charged for a bank loan, or on credit cards balances

Here are the best P2P lending platforms, and details about each company’s lending practices.

Best Peer to Peer Lending Platforms

All of the platforms are required to quote loan interest rates based on the annual percentage rate, or APR. Investopedia defines APR as the actual yearly cost of funds over the term of a loan. The rate also calculates the amount of principal you’ll repay each year. 

APR includes both the interest on the loan, and the loan origination fee costs. Note however, that APR does not take interest compounding into account. 

Here are some of the larger P2P platforms used by investors and borrowers.

Lending Club Overview

The LendingClub has issued over $50 billion in loans to over 3 million customers.

The firm offers fixed interest rate personal loans of up to $40,000, and collateral is usually not required. Borrowers can get a loan decision and funds in as little as four days, and there is not a penalty for loan prepayment.

Borrower details

LendingClub’s current loan rates range from 10.68% to 39.89% APR.  Borrowers are charged a one-time loan origination fee of 2% to 6%, based on the individual’s credit score, and the fee is deducted from the loan proceeds. If the borrower receives a loan offer, he or she is given the choice of a 36-month or 60-month loan.

Once the loan is in place, the borrower must make payments on time. If a payment is more than 15 days late, the borrower is charged 5% of the unpaid payment amount or $15, whichever is larger. Late payments sharply increase the cost of the loan.

Investor details

Investors can start an account with a minimum of $1,000. Investors purchase notes, and notes are securities that correspond to fractions of loans. Here are some facts regarding notes, which apply to most P2P platforms:

  • Notes are considered investment securities that are registered with the SEC. 
  • Each note is graded, based on the credit risk of the loans in the note, and interest rate charged on the note’s loans.
  • The company recommends that investors purchase a diversified portfolio of notes to reduce investment risk. LendingClub states that 99% of investors with more than 100 notes have earned positive returns on their investments.

Notes mature in three to five years and are repaid monthly by borrowers. As principal and interest is repaid on the loans, you can reinvest using an automated allocation process, or use a manual system to reinvest. You can set the automated system to reinvest in notes based on credit risk, and interest rate criteria that you choose.

Upstart offers some unique features to P2P investors.

Upstart Overview

Upstart has originated more than $6.7 billion in consumer loans since launching in May 2014, and the company has a unique process for determining a borrower’s default risk:

“Our proprietary underwriting model goes beyond FICO scores — it identifies high-quality borrowers based on signals of their potential, even if they have limited credit and/or employment experience. We call these consumers ‘future prime’ borrowers.”

Borrower Details

In addition to credit history, Upstart uses the borrower’s education and job history as factors when making a loan decision. When you initially apply for a loan, the application will not impact your credit score. Here’s an explanation of the credit reporting policy:

“When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.”

You can borrow from $5,000 to $30,000, and interest rates vary from 6.18% to 35.99%. You can choose a 3 or 5-year term for a loan. Currently, the average 3-year loan on the Upstart platform charges a 22% interest rate.

If the borrower accepts a loan by 5pm ET (not including weekends or holidays), he or she will receive the funds the next business day. For loans that are being used for education-related purposes, there is an additional 3-business day period between loan acceptance and when the individual receives the funds.

There is no prepayment penalty on Upstart loans. 

Investor details

Upstart funds loans using assets from financial institutions and wealthy individuals, which the firm refers to as partners. Upstart promotes its use of AI to improve the lending process for partners:

“Upstart offers a complete range of AI solutions for optimizing consumer lending. With smarter decisions, you can say yes to more borrowers and improve your portfolio performance.”

An Upstart study used the loan underwriting process of three banks, and evaluated the approval rates and loan loss rates using Upstart’s borrowers (as of 12/31/17).

Upstart’s study indicated that the firm had 173 percent more approvals with the same default rate when compared to big banks. The company also noted 75 percent fewer defaults with the same approval rate as big banks, based on how they qualify borrowers.

About 88% of Upstart loans are either current or paid in full.

FundRise Overview

FundRise markets itself as the first simple, low-cost real estate investment platform. Investors purchase a portfolio that invests in dozens of real estate projects, and the fund reports 8.7% to 12.4% historical annual returns. 

Many investors have portfolios in stock and bond investments, but not in real estate. By adding real estate to the portfolio, investors add diversification. This strategy spreads the investment risk over three types of investments, rather than two.

There are downsides to investing in real estate, however. Selling real estate requires appraisals and other legal work, and the process can take months. For this reason, real estate is considered an illiquid investment (an investment that cannot be sold quickly).

Conversely, stocks and bonds are liquid, because they trade on exchanges that are open each business day.

This firm invests in private market real estate. FundRise explains here that investment portfolios with at least 20% of the assets in real estate have outperformed portfolios that only invest in stocks and bonds.

Commercial real estate produces investor returns from rent and lease payments, and through the price appreciation of the real estate. You can choose an investment plan that focuses on steady rental and lease income, or a plan that focuses on price appreciation.

You can open an account for a minimum of $500.

Funding Circle Overview

Funding Circle focuses on the small business market. The company offers Small Business Administration (SBA) loans, including SBA 7(a) loans to provide capital to small businesses. The firm has helped over 81,000 small businesses obtain $11.7 billion in financing.

Funding Circle emphasizes that small businesses should be protected from unfair, deceptive financial practices. The firm co-wrote the first standard for the small business lending market, The Small Business Borrower’s Bill of Rights. Funding Circle is also a founding member of the Marketplace Lending Association, which was created to protect borrowers.

Borrower Details

SBA 7(a) loans allow small businesses to borrow anywhere from $25,000 to $500,000, and the interest rate is currently 6%. The loan term can be up to 10 years, and there is no prepayment penalty.

Funding Circle works with Preferred SBA Lenders, which are firms that offer in–house approvals and accelerated processing. These lenders give business owners fast answers and even faster closings.

Small businesses who meet the below criteria are eligible to apply for an SBA 7(a) loan:

  • In business for more than 3 years
  • At least $400,000 in annual revenue
  • No federal tax liens
  • 680 FICO for personal guarantor (Business owner’s personal guarantee)
  • Positive book value (company assets are greater than liabilities)

How to apply for an SBA 7(a) loan:

  1. Start your application online in 6 minutes by answering a few questions about you and your business. Applying will not impact your firm’s credit score
  2. Receive a call from your dedicated Account Manager who will get to know your business and discuss your needs in order to help you complete your application
  3. Submit applications to SBA preferred lender partners. 
  4. Review and approve your Proposal Letter outlining the terms of your unique loan
  5. Collect remaining documents and submit complete loan package for final underwriting
  6. Sign your formal loan agreement

When you apply for the loan, you must provide three year of business financial statements and tax returns. Any owner who is guaranteeing the loan must also allow the lender to pull their credit history, and provide three years of personal tax returns.

Small business borrowers pay these fees:

  • SBA Loan Guarantee Fee – 1.7% for loans up to $150k and 2.25% for loans greater than $150k
  • Broker / Agent fee – Origination fee paid to the lender
  • Closing Costs – Costs associated with underwriting expenses such as background checks, placing liens, credit pulls

Over 100,000 global investors have used Funding Circle’s loan marketplace, including individuals, national banks, and governments.

Investor details

Individuals can invest in American small businesses through the purchase of notes issued by Funding Circle. Small businesses receive the funds they need to grow, and investors can earn attractive returns through the borrower’s monthly installment repayments.

Here are some other features:

  • Investors use their online account to easily lend to hundreds of businesses looking to borrow.
  • Funding Circle reviews applications and approves creditworthy businesses. The company then pays out their loans and process repayments for investors.
  • Businesses make fixed monthly repayments with interest, which Funding Circle distributes to all the investors who lent to them.

Funding Circle investors have earned historical annual returns of 5% to 7%. Historical annual returns are calculated as the sum of interest paid, minus the 1% servicing fee and defaults, plus recoveries, relative to the principal amount. 

How to invest:

  • Sign up for an account, and Funding Circle will verify your status as an accredited investor. Investopedia explains the requirements to be an accredited investor. Generally speaking, these investors have higher annual income, net worth, and more investment knowledge than other investors.
  • Invest a minimum of $25,000 into fractional notes, which represent a portion of a small business loan. You can automate the investing process, or choose notes manually. You can invest as little as $500 in a specific fractional note.
  • Monitor the monthly repayment of loans online. You can reinvest your earnings automatically or manually.

You are charged a 1% fee on loan repayments, and there are no other fees charged to investors.

StreetShares Overview

StreetShares provides secured and unsecured loans to businesses.

Borrower details

Secured loans require collateral. Business owners can secure the loan with personal property (real estate, vehicles), or by using business inventory, equipment, or accounts receivable balances. 

Owners can also apply for unsecured loans, which do not require collateral. StreetShares provides unsecured lines of credit that businesses use for short-term financing. 

The company also focuses on business loans for veterans. These owners may have gaps in their financial history, due to military service. Veteran small business loans are often easier to qualify for, and can offer better rates and terms than traditional small business loans. 

To apply, owners provide company bank statements, tax forms, and credit reports. The lender will also need time to secure the collateral and appraise the assets, if necessary.

Investor details

Investors can purchase Veteran Business Bonds, which currently pay a 5% interest rate. StreetShares has used the proceeds from bond sales to originate $100 million in loans. 

The bonds have a 3-year term, and investors must pay a 1% fee on any funds withdrawn before the end of the term. Investors can open an account with as little as $25. You can download an offering summary that explains the investment details here.

Peerform Overview

Peerform offers unsecured loans with rates from 5.99% to 29.99% APR. You can apply online, and the application will not impact your credit score. 

Borrower details

Loan amounts range from $4,000 to $25,000, and Cross River Bank originates the loans. The interest rate you are charged depends on your credit ranking, which is your Peerform grade. Borrowers pay a loan origination fee of 1% to 5%, based on the Peerform grade.

There is no prepayment penalty on your loan.

Investor details

Accredited investors can invest in Peerform loans. Peerform uses an algorithm to analyze the risk of loans and to determine the loan interest rates. Currently, the firm provides investing access to institutional investors purchasing whole loans.

Cross River Bank underwrites loans based on specific loan criteria, including:

  • Minimum FICO credit score of 600
  • Borrower debt-to-income ratio below 40%
  • A credit profile with no current delinquencies

Peerform uses a number of other factors to grade each loan, and the grade helps to determine the loan’s interest rate.

Prosper Overview

Prosper has provided $17 billion in loans to 1 million customers.

Borrower details

Just as with other P2P firms, Prosper provides loans with 3 or 5-year terms, and there is no prepayment penalty. Eligible consumers can borrow up to $40,000.

Origination fees vary between 2.41%-5%, and interest rate APRs through Prosper range from 7.95% to 35.99%, with the lowest rates for borrowers that have the best credit evaluations. Checking the interest rate available on a loan does not affect your credit score.

Investor details

Investing in Prosper requires you to meet suitability requirements. Investors must document their gross income, net worth, and investment experience, because P2P investing is more complex and carries more risk than traditional investments. Suitability requirements vary by state.

Prosper provides investors loan ratings from AA (lower risk, lower return) to HR (higher risk, higher return). Annual investment performance has ranged from 3.4% to 8.3%, and the historical return averages 5.1%.

Investors can search Prosper loans based on credit rating, dollar amount borrowed, interest rate charged (yield), and percentage of the total loan funded by investors. The minimum investment amount is $25.

Kiva Overview

Kiva is an international nonprofit, founded in 2005 and based in San Francisco, with a mission of expanding financial access to help underserved communities thrive. More than 1.7 billion people around the world are unbanked and can’t access the financial services they need, and Kiva exists to address that problem. 

The firm has worked with over 1.9 million lenders who have financially supported 3.6 million borrowers in 76 countries. A Kiva loan may fund a student’s tuition, help a woman start a business, or allow a farmer to invest in equipment. Kiva does not pay investors a rate of return, and you should view Kiva investing as a donation that a borrower will pay back without interest.

100% of funds lent on Kiva go to funding loans, which are referred to as Monthly Good support. Optional donations fund Kiva’s operations.

Investor details

You can start with Kiva by signing up for a monthly funding amount. Here are some other details that explain the lending process:

  • Kiva lends 100% of your funds to a borrower who needs financing to reach his or her goal. The borrower might be a farmer, student, artisan, or shopkeeper. 
  • Kiva updates the investor monthly to explain who the borrower is, and how they are using the funds to overcome a particular problem.
  • As the borrower repays funds, you can set up your account to automatically reinvest the proceeds into a new loan.
  • If you choose to stop monthly contributions, you can have Kiva continue to loan the balance in your account, or you can withdraw your funds.

Kiva reports that 96.7% of loans have been repaid.

Borrower details

In a Partner Loan, Kiva works with local nonprofits or lending institutions, which approve the borrower’s request. Kiva performs due diligence on the borrower’s application, and monitors the repayment status of the loan.

A Direct Loan is approved through “social underwriting”. Friends or family members determine the trustworthiness of the borrower, because they lend a portion of the loan dollars requested. In other cases, a Kiva-approved Trustee will confirm the trustworthiness of the borrower.

Once either type of loan is approved, investors fund the loan through the Kiva website.

Advantages, Drawbacks and Controversy of Peer to Peer lending

Investors and borrowers must fully understand P2P lending before opening an account on any P2P platform.

Investor risks

P2P platforms do not have the same financial controls in place as traditional lenders, and this increases risks for investors.

Bloomberg points out that the industry lacks the sorts of collateral and loan reserves that get traditional banks through tough times. A bank will require collateral (home, car) before originating loans to most individuals. Bank regulators also require banks to set funds aside to cover potential losses on loan defaults. 

P2P firms may not have these controls in place to reduce default risk. In a slowing economy (particularly during the coronavirus pandemic), borrowers may lose their jobs or see revenue declines in their businesses. These borrowers may fall behind on loan payments, or default.

P2P loans are, for the most part, unsecured. If a large number of unsecured loans default, P2P investors will incur large losses. There is no collateral for the lender to sell, and the P2P firm is not required to set up reserves to pay investors for losses.

Borrower risks

Interest rates charged on P2P loans may be much higher than rates charged by traditional lenders, and higher rates make it more difficult to repay the loan over time.

High interest rates mean that the monthly repayment amount will be higher. In an economic downturn, a borrower on a limited income will find it more difficult to repay a loan. The risk of default is higher, and a default has a big impact on the borrower’s credit rating.

Is Peer to Peer Lending Safe?

P2P investors and borrowers are exposed to higher levels of risk, when compared with traditional investments.

Bank checking accounts and certificates of deposit (CDs) offer Federal Deposit Insurance Corporation (FDIC) insurance to protect investors from losses. Financial institutions are also required to reserve funds, which are used to cover the cost of loan losses. P2P firms do not have this requirement.

While the historic risk of P2P defaults listed above are fairly low, the current economic downturn may sharply increase default rates. P2P investors and borrowers face higher risks today than in past years.

Investors must understand that the FDIC does not provide insurance for P2P loans. The investment may lose value, and past investment performance is not an indication of future returns.

Final Thoughts

P2P investing may be suitable for experienced investors with a high net worth.

If an individual invests a small portion of their investment dollars into a P2P lending platform, they are able to diversify a portfolio that is invested only in stocks and bonds. High net worth can afford short-term losses in a P2P investment, and experienced investors have the sophistication to understand the risks and potential returns.

Investors who are less experienced should consult with a financial professional before investing in P2P platforms.

P2P borrowers must understand how higher interest rates make it more difficult to repay a P2P loan. While P2P platforms lend to borrowers who can’t get loans through traditional banks, loan repayment can be a challenge. Borrowers should carefully consider the total cost of borrowing before signing a P2P loan agreement.