Marketplace Lending

Are you already familiar with private lending investments? Did you know many alternative asset investors lend money via online marketplaces through marketplace lending (MPL)? This investing method is also sometimes referred to as peer-to-peer (P2P) lending, social lending or crowd lending.

Marketplace lending investments emerged in 2006 and are now a mainstream option for private lending investors.

The ultimate purpose of MPL is to connect borrowers (consumers and small businesses alike) with lenders (both individuals and institutions) via a secure online marketplace, called a portal. These lenders, many of whom are investing via a Self-Directed IRA, could invest in such private loans as consumer debt, student debt, small business debt (generally $500K or less), automobile refinance and real estate property.

Once a borrower is approved by the platform, his or her loan will be available for investors to pick from. Once the loan has gathered enough investors, the platform wires the full loan amount to the borrower. As with normal installment loans, the borrower pays back the loan in equal, monthly amounts until it’s paid in full. Most platforms even allow an auto-invest option, where the system selects the notes for you based on your preset parameters. 

A lender could anticipate better yields since he or she would set the loan parameters and can build a diversified lending portfolio across a wide range of fractional notes associated with separate borrowers. The borrower makes monthly payments of principal and interest to the marketplace, which then sends a secure payment to the lender. Also, marketplace loans are normally short-term, which reduces risk. 

To illustrate, let’s consider this case study:

Walter, who has $10,000 in IRA funds to invest with, only wants to invest $100 in any one loan. He distributes funds over 100 individual borrowers ($100 x 100 = $10,000) as a means to diversify his overall investment. Walter then begins to see monthly returns into his IRA from the various loans.

Even borrowers with the best intentions could default, and a few of Walter’s marketplace lending investments end in default. However, he believes his ability to diversify over 100 borrowers outweighs the risk of default among a few. Spreading his investment out over many loans allows such defaults to wash through without severely impacting his returns.

Consumer loans originated through marketplaces are generally governed by the same consumer lending laws that apply to traditional bank loans. This includes the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collections Practices Act and more. In addition, the same commercial lending laws applicable to other commercial loan arrangements apply to those facilitated by online marketplaces. Also, since many credit marketplaces partner with banks, their lending programs operate under the regulatory authority of the bank regulators.

How to Get Started

Simply add one step to our regular 3-step process to be on your way to marketplace lending via a self-directed retirement account:

1. choose an MPL platform (ensure it allows MPL investments to be held in retirement accounts)
2. open a Kingdom Trust account
3. fund your Kingdom Trust account via transfer, rollover or contribution
4. tell us what you want to purchase

Kingdom Trust does not sell or provide investment advice, but we do custody client accounts investing in MPL opportunities, provided they adhere to SEC regulations. We strongly encourage investors interested in MPL to conduct the proper due diligence.

If you have questions about marketplace lending with retirement funds, contact Kingdom Trust today!