The volatility in the stock markets and rock-bottom rates in most categories of bonds have prompted more investors to turn to peer-to-peer lending platforms for higher yields.
It's easy to see the appeal. Since 2009, average net annual returns for investors who lent money through Lending Club and Prosper Marketplace, two of the largest peer-to-peer lending platforms for consumers in the U.S., have ranged from 5 percent for its most creditworthy borrowers to to 9 percent for its subprime borrowers. (The average credit score for a borrower in Prosper's lowest-rated loan category is 664.) Compare that to about a 1.5 percent yield for a five-year Treasury bond, as of Friday, and about a 2 percent yield on average for Aaa-rated, 5-year corporate bonds.
"Demand from borrowers and investors, retail and institutional, remains at an all-time high," said Ron Suber, president of Prosper Marketplace, adding that the company is on track for a record quarter. "On a relative basis to the fixed-income market, Prosper's loan performance is even stronger given the recent market volatility."
Lending Club, which had an initial public offering in December, has seen loan originations nearly double year over year to $1.9 billion as of June 30 and more investors using the platform. (See chart below.) A Lending Club spokeswoman said that "it's early days, but if the volatility continues, we certainly wouldn't be surprised" if that increased demand from investors for peer-to-peer loans.