By Reza Machdi-Ghazvini (CAIA)
Peer-to-peer lending has been growing in popularity for several years. There are good reasons for this. However, investors should not ignore the possible risks.
Numerous investors are taking advantage of the opportunity to lend money to other private individuals via the Internet. However, there are also many people who are sceptical about peer-to-peer lending. They see private lending as too high a risk and would rather invest their money safely. In the following, we therefore go into why it can make sense to invest in peer-to-peer lending in this day and age. We also highlight potential risks. In this context, you should also include P2P Lending with buyback guarantees in your consideration.
Five reasons to invest in peer-to-peer loans
Since 2008 we saw a development of interest rates shrinking to historically low levels. This made it impossible for investors to find conservative or safe investments that are interesting to invest in. Investing in the stock market cause anxieties of losing their money for many customers of banks and financial services companies. For these consumers, investing in peer-to-peer loans is a great alternative. We show below 5 reasons why investing in peer-to-peer loans makes sense:
1. High returns with low interest rates
Peer-to-peer lending can still generate returns of 10 percent and more, even in times of low interest rates. Of course, these returns are not guaranteed, and lower returns may occur. However, on average and with good diversification, returns in this range are not a problem. Investors looking for a way to generate above-average returns even in a low-interest-rate environment should use peer-to-peer lending. For example, it is a good idea to invest only part of the assets in this line of business.
2. Investment horizon and risk can be self-determined
As mentioned at the beginning, many investors are afraid of the risk involved in an investment in peer-to-peer loans. However, the risk can be self-determined, as each investor decides which loans to invest in. For example, as an investor, you can choose to only lend to borrowers with very good credit ratings. Of course, the return is then somewhat lower.
Furthermore, the risk can be easily diversified by spreading the investment amount over as many borrowers as possible. If a loan then defaults, the loss is limited and can be easily absorbed by the income from the other loans. Some platforms for investing in peer-to-peer loans even provide insurance against loan defaults. The providers thus pay the defaulted loan back to the investors. This significantly minimizes the risk.
3. The investment can be done completely online and is flexible
Peer-to-peer lending is simple and straightforward which makes it easy for consumers who want to invest their money in a convenient way. The positive reviews and experiences of numerous investors show how online investing in peer-to-peer loans can be done from the convenient of your own home. One’s portfolio can always be viewed and modified online. It is even possible to automate one’s own investment process. This procedure is not possible with any traditional bank, where many contracts always must be signed.
4. Passive income can be generated with peer-to-peer loans
A great advantage of investing in peer-to-peer loans is that passive income can be generated. This is because the loans are repaid on a monthly basis and thus the investment amounts and the interest earned flow back to you as an investor on a regular basis. In this way, you can build up a nice additional income that flows fully automatically. With passive income, investors can therefore generate another source of income for themselves, which is also independent of developments on the money and capital markets.
Those who already generate passive income through dividends and/or rental income can expand their portfolio in this way and hedge against defaults. Peer-to-peer loans are thus an excellent way of generating a regular cash flow and gradually expanding it.
The advantage here is that peer-to-peer loans still work when the economy is in recession. Stock prices, for example, sometimes fall very sharply in economically turbulent times and dividends are also cut. Loans, on the other hand, are always needed and are more independent of economic fluctuations.
5. Investment in peer-to-peer loans is associated with low fees
A great advantage of investing in peer-to-peer loans is that there are only low fees associated with it. There are now a variety of different providers, so that the cheapest and best provider can be selected via an independent comparison. People who want to invest in the stock market are oftentimes being charged high fees or issue surcharges. This is however not the case when people invest in peer-to-peer loans. Thus, the high returns that can be earned are not diminished by high costs.
Conclusion on investing in peer-to-peer loans
Investing in peer-to-peer loans is a modern, flexible, and cost-effective alternative to conventional investment options in today’s world. In times of low interest rates, it is hardly possible to earn high returns. With peer-to-peer loans, however, this is easily possible.
Even if there are risks associated with this form of investment, these risks can be avoided or minimized with various measures.
About the Author
Reza Machdi-Ghazvini (CAIA) is an expert in finance and the founder of Enqome. He wants to show people how to safely manage their personal finances and gain more financial freedom.