If you spend a lot of time on the internet, especially researching various financial investments, you’ve probably come across the term peer to peer lending. You may also have seen it referred to as P2P lending. Furthermore the phrase ‘peer to peer’ can often be changed to ‘person to person’. This is because money is lent from one person to another.
Does peer to peer lending have advantages over other forms of lending?
Yes it does, and this applies to both the lender and the borrower. If you need to borrow some cash and you have been turned down by your bank, peer to peer lending offers another alternative that completely cuts out the banking system.
In terms of the borrower, there is an opportunity to lend money in favor of specific loans. The benefits here are that you have the chance to earn a far higher rate of interest than you’d get if you were to invest your money in the average bank account.
Surely there are risks?
There are risks, just as there are with most other forms of investments. It’s worth remembering that owing to the increased degree of rewards typically involved, there is also an increased degree of risk.
However this risk can be mitigated in some ways. For instance let’s suppose you have a conservative $200 to invest. Instead of piling it all into one loan, you could split it into eight different $25 loans. If you were to earn, say, an 8% return on seven of the eight loans while losing out on the remaining one, you would do better than you would if you had invested all $200 in one loan that didn’t pay back.
What are the main peer to peer lenders in the US today?
There are two major players worth investigating more closely. The first is called Prosper, which states that it provides seasoned returns of approximately 10.02%. The second is Lending Club, which boasts “twenty consecutive quarters of positive returns”, according to its website. We’ve written an in depth review of Lending Club at http://everythingfinanceblog.com/lending-club-a-review.html.
Investigate fully and understand what you are investing in
As with all types of investments, it is important to make sure you understand exactly what you are getting into before you invest anything in a peer to peer lending situation. You should be well aware of the inherent risks and make sure you have a balanced portfolio to mitigate the risks, as mentioned above.
Peer to peer lending may not suit everyone, but there is certainly a market for it. If you are looking for a different way to invest that puts you in control of the specific opportunities you are investing in, this could be worth a closer look. Furthermore it gives you the opportunity to help individual people find the funds they are looking for. So it might just be the 21st century way of investing, with a bright future attached to it. We will be watching closely.