Peer-to-peer lending (P2P) has been around for a long time, exploding in popularity in recent years with advances in online technology. An investment vehicle once limited to large corporations and institutional investors, it’s now available to regular investors like you and me.
With a mandate of supporting Canadian small business, while also providing fixed income investors with an alternative to the GIC products offered by banks and credit unions, Lending Loop has established itself as Canada’s premier peer-to-peer lending platform. There are other competitors, but they deal exclusively with large, institutional investors.
In this article, I’ll show you how to use Lending Loop as an investment platform, by pooling your funds with thousands of other lenders, with the potential of earning attractive rates of interest on your money. The best part is that you can get started with as little as $200, and signup is completely free.
I’ve invested a small amount of test money with Lending Loop and really like it. It’s become a nice complement to my overall investment portfolio. Before we explore everything Lending Loop has to offer, let’s take a closer look at the concept of peer-to-peer lending.
Peer-To-Peer Lending Explained
Peer-to-peer lending, otherwise known as P2P lending, is a platform that matches lenders and borrowers. Usually offered online, individuals, or in the case of Lending Loop, small businesses, borrow money from hundreds, even thousands of individual lenders, who have pooled their money together.
Freed from the high overhead of traditional bricks and mortar financial institutions, peer-to-peer lending companies can grant loans to borrowers at a lower interest rate, while providing better than average returns for investors.
When the loans are repaid in full, the lender gets their principal investment back, along with the annualized interest, which has been repaid by the borrower over the term of the loan.
What Is Lending Loop?
Lending Loop is a Canadian peer-to-peer lending company headquartered in Toronto. Using an online platform, they provide loans to Canadian small businesses that are funded by individual borrowers pooling their money together. Lending Loop is fully regulated, with a mandate of connecting investors with small businesses that are looking for affordable ways to borrow.
How Does Lending Loop Work?
It all begins with the borrower. A small business applies for a loan using a simple, online application. Lending Loop evaluates the application, taking into account a number of factors, such as the company’s financials, as well as their creditworthiness.
Once Lending Loop has determined that the company qualifies for funding, their request is placed on the Lending Loop Marketplace (more on that later). Individual lenders can now view the company’s loan request, and decide if they want to lend their money to that particular company.
Not all borrowers are equal, however. During the evaluation process, Lending Loop assigns a risk rating to each loan, ranging from A+, for the lowest risk borrowers, to E, for the highest risk. The higher the risk, the higher the interest rate that’s offered to individual lenders. Returns can range anywhere from around 6% to 26%.
The loan remains in the marketplace until enough lenders come forward to fully fund the loan. Depending on the size of the loan, the process can take anywhere from a few days to a few weeks, to sometimes not funding the loan at all, and the request being withdrawn.
How To Sign Up With Lending Loop
Lending Loop makes the signup process easy for lenders. The first step is to give them the necessary personal information. They will require your Social Insurance Number for tax purposes. From there, you’ll complete a short questionnaire, to help Lending Loop better understand your investment preferences.
You then need to make your first deposit into your Lending Loop account, as a transfer from your primary bank account. The minimum investment is $200, but after that, you can invest in increments of $25.
Once everything is confirmed, you can begin perusing available lending opportunities in the Lending Loop Marketplace. This is when you can also set up the Auto-Lend feature, which automates the process. I’ll explain Auto-lend in further detail below.
Is Lending Loop Safe?
According to the Lending Loop website, all funds deposited are held in trust with a Canadian Chartered bank, and funds are transferred using the same secured networks that your bank uses. Peer-to-peer lending is considered a mature industry in Canada, and it is regulated. In fact, a few years ago, Lending Loop voluntarily made changes to how they were organized, in order to meet the highest possible regulatory standards.
As far as the investment itself, there is always some risk involved. The money you lend out is not guaranteed and could drop in value. But this is no different than a lot of investments. The important thing is to stay within your risk appetite. Lending Loop makes it possible to diversify by lending to companies of various risk levels. This can help to mitigate your risk.
As I mentioned earlier, I’ve been investing with Lending Loop for a while now. I’ve attached screenshots from my very own Lending Loop portfolio below, to show you how all of it works.
Lending Loop Dashboard
The Lending Loop Dashboard allows you to view the details of your overall investment in a single glance. The dashboard below displays my lifetime earnings ($59.52), the average gross yield of my investment before fees (13.6%), and the amount of funds I have available to lend ($13.16). While I’ve only deposited a small amount as a test, with an average double-digit return, you can clearly see the investment potential.
Lending Loop Portfolio
In this next screenshot, you can see a portion of my Lending Loop portfolio, with a list of the various loans I’ve placed money into. Here’s a breakdown of each column:
- Loan Title – explains the purpose of the loan
- Risk – displays the risk rating for this particular loan/business
- Amount Lent – how much money I have invested in each separate loan
- Posting Supplement – references disclosure document for each specific loan, which lenders can view online
- Principal outstanding – my share of the loan that remains unpaid
- Maturity Date – maturity date of each specific loan
There is also a comments column, where lenders can view more details specific to the loan, and the borrower.
The Portfolio Analytics screen contains a wealth of data that provides insight into a lender’s overall portfolio. The following screenshot displays the percentage I have invested in each risk category, from A+ to E. In my case, more than 50% of the money I’ve lent is to businesses with a risk rating of B or higher.
This gives a clear indication of the risk level of my portfolio, and lets you see a breakdown of the portfolio by repayment period, industry type, even geographic location, which you can see in the final diagram.
Lending Loop Marketplace
To find a small business to lend money to, you need to head to the Lending Loop Marketplace. This is where all approved loans are listed for potential lender’s to view. There is a wealth of information located here, including the purpose of the loan, the industry, as well as the interest rate being offered, as well as the corresponding risk rating. You can even see the full loan amount, and the scheduled repayment period (term).
Like any investment, it’s important that you do your research. Ask yourself, is the company in an industry you feel is solid and does the repayment term align with your investment time frame? After all, the funds you lend won’t be returned to you until the loan is paid in full.
What Is Auto-Lend?
Auto-Lend is the feature I use to invest with Lending Loop. Auto-Lend automates the lending process, by allowing you to make regular contributions using pre-set criteria. As you can see in the image below, I have Auto-Lend set up to invest $25 at a time into any risk class. I can adjust the amount I contribute, as well as the risk I’m willing to take on. Auto-lend comes in handy if you want to keep things simple and make sure you’re properly diversified.
Lending Loop Fees
The fee structure at Lending Loop is very straightforward. Lenders are charged a 1.5% fee, which is taken from the total return. For example, if you’re investing in a loan providing a return of 7.0%, your net return would be 5.5% after fees. All things considered, this is a very reasonable price to pay for a fixed income investment with the potential to provide a far better return than any GIC.
For the borrower, there is a one-time setup fee that ranges between 3% and 6.5% depending on the risk rating that’s assigned to the business. This is no different than most banks, who usually charge a setup fee for small business loans. Some even charge an annual review fee.
With Lending Loop, borrowers only pay the setup fee after the loan is approved and they have received the funds. The fee is deducted from the loan proceeds at the time of funding.
Such is the beauty of peer-to-peer lending. Because everything is done online, companies like Lending Loop incur far less overhead and can lend money at a lower cost than traditional financial institutions. In my opinion, the fees you’ll pay with Lending Loop are reasonable for both the lender and the borrower.
A Note About Possible Collection Fees
If Lending Loop needs to take action to collect payments from a borrower, they may need to charge a collection fee to offset the costs associated with the collection of funds. If this were to happen, the collection fee could be taken from the funds a lender receives on repayment. Lending Loop makes it clear that they would never debit a lender’s account for this fee, and if funds cannot be collected, no fee would be charged. This is something to consider, however, especially if you’re lending money to a high-risk borrower.
The Pros And Cons of Lending Loop
Like anything, there are pros and cons to investing with Lending Loop. Based on my own experience, and what I know, here are a few of each that I’ve come up with:
- Ease of use – Lending Loop is only available online, meaning that you can lend, or borrow, from the comfort of your living room. The convenience is hard to beat.
- Low point of entry – You can begin lending money for as little as $200 through Lending Loop, and subsequent contributions can be made for as little as $25.
- Attractive returns – Lending Loop offers investors the potential to earn rates of interest they could only dream about in a GIC through their bank or credit union.
- Free to join – Lending Loop is completely free to join. If you’re interested in signing up just to see how everything works, you have nothing to lose.
- You’re supporting Canadian small business. Not everyone cares about this, but it was definitely something that appealed to me when I invested my money with Lending Loop.
- Investment risk – While Lending Loop is fully regulated, there are risks to investing in the fortunes of very small businesses. That’s why interest rates on the lowest quality loans are as high as 26%. Make sure you stay within your risk profile.
- Lack of liquidity – The Lending Loop marketplace isn’t like the stock market. You can’t just sell and get out at any time. Your funds are only fully available after the loan is repaid. That could be in as little as a few months, but it could also be a few years. Make sure you can lock your money in for the required time period.
Is Lending Loop Right For You?
Now that you know more about peer-to-peer lending and Lending Loop, you may be trying to decide if it’s right for you. Here’s my take. If you’re looking for ways to make more money on your fixed-income investments, you may want to consider investing a small percentage of your portfolio with Lending Loop. After all, you won’t get very far with GICs paying 1-2% interest.
Investing with Lending Loop will increase your potential for return, and it can be a lot of fun. The important thing is to stay within your risk tolerance. If you’re unsure, you could always take my approach, by opening an account, and investing a small amount of money as a test, to see how it goes.