Investing in Peer-to-Peer Loans

Maximize your returns: Understanding the potential of P2P lending for investors

Peer-to-peer lending has been growing exponentially across developed and now developing nations as well in the past decade. Many researchers hypothesize that this rising popularity is due to the sophistication of internet users and the structural issues in traditional banking. In this article, we’ll simplify peer-to-peer lending and prepare you to explore this growing trend with a better understanding.

Peer-to-peer lending is a financial service where people who want to borrow money can apply for loans from people who have money to lend. It's a simple concept that's revolutionizing the way people borrow and invest their capital. While peer-to-peer lending is not a new concept, the age of the internet has made peer-to-peer an easily accessible and global system. The benefits of peer-to-peer lending are important to understand, especially if you're thinking of diversifying and becoming an investor in this area. So let's delve into how peer-to-peer lending works, its pros and cons as an investment strategy and how you can get started!

What is Peer-to-Peer Lending?

Peer-to-peer lending is a way for people to lend money to each other. It is a way for you to get a loan without going to the bank, and it's an alternative to traditional banking.

When you lend your money through peer-to-peer lending, you'll earn interest on that loan—and sometimes even as much as 15%. In return, the borrower will pay off their loan with interest over time. In peer-to-peer lending, you directly lend to individuals seeking personal or business loans and cut out middlemen which are usually banks, credit unions, and other financial institutions.

Risk Management in Peer-to-Peer Lending

The peer-to-peer lending process is all about risk management while keeping the process simple and transparent. Risk management is the process of identifying, assessing and controlling risks. A key aspect of risk management in peer-to-peer lending is assessing borrower creditworthiness.

The methods used by peer-to-peer lending companies to assess borrower creditworthiness can be broken down into these factors:

• Demographic factors - examples include age, gender, marital status and location (city/state).

• Financial factors - examples include income, rent or mortgage payments owed on other properties owned by the borrower and employment history of the borrower’s guarantors (if any)

Investing in Peer-to-Peer Loans

There are many platforms that allow you to invest with small amounts, or you can invest more if you have the means.

Benefits of Investing in Peer-to-Peer Lending:

1. Higher Return on Investment: Investors who get involved in peer-to-peer lending can often enjoy higher rates of return than other investments, with loans providing annualized returns of 7-14%.

2. Low Risk: Peer-to-peer loans are often scattered across many borrowers, making them much less risky lending to few people. This means that there is less chance of a total default on your principal and interest.

3. Portfolio Diversity: Investing in peer-to-peer loans can be a great way to diversify your investment portfolio. With the ability to invest in loans from different borrowers and different countries, you can spread your risk across multiple investments to reduce your overall risk exposure

4. Liquidity: Investors don't need to wait for years to get their money back. Peer-to-peer loans are available for a set period of time and can, often, be sold on the secondary market at any time for a return on your investment

In conclusion, peer-to-peer is a great way to diversify your investment portfolio. It offers the potential to earn higher returns than traditional investments as well as offering the convenience of online application and borrowing process. Be sure to do your research on the quality of borrowers before investing and understand the risks associated with lending your money. Good luck investing!

Here’s a (not exhaustive) list of some popular P2P lenders for you to explore and get started:

1. Lending Club

2. Prosper

3. Upstart

4. Funding Circle

5. PeerStreet

6. StreetShares

7. LendingHome

8. Patch of Land

9. Funding Hero

10. Fundrise

Please note that these platforms and their availability varies by country and region, and also it's important to do your own research, and check their terms and conditions, fees and regulations before investing. Some platforms may have different specializations like business loans, real estate loans, personal loans, etc.

“Is information technology going to disrupt finance? My first response is: please. My second response is: yes.”

– Martin Wolf, 2016