You may have heard of peer-to-peer lending and wondered what it is and how it works. Maybe you’ve seen ads for companies like Prosper or LendingClub and been curious about how you can get involved. Or, maybe you’re already an investor in traditional stocks and bonds and are looking for new opportunities to diversify your portfolio.
In this comprehensive guide, we’ll discuss everything you need to know about peer-to-peer lending, including what it is, how it works, the risks and rewards involved, and some of the best platforms currently available. By the end of this guide, you’ll be equipped with the knowledge you need to make an informed decision about whether or not investing in peer-to-peer lending is right for you.
Table of Contents
What is peer-to-peer lending?
Peer-to-peer lending—also sometimes referred to as “P2P lending”—is a type of lending that happens between two individuals, without the involvement of a financial institution like a bank.
Historically, if someone needed to borrow money, they would go to a bank or other financial institution and apply for a loan. The loan would then be approved or denied based on the borrower’s creditworthiness. If the loan was approved, the borrower would then make regular payments to the bank until the loan was paid off in full, plus any interest that had accrued over time.
With peer-to-peer lending, things work a bit differently. Instead of borrowing from a financial institution, borrowers can borrow directly from individual investors (like you!). And instead of making one lump-sum payment at the end of the loan term, borrowers make regular payments throughout the life of the loan—usually on a monthly basis.
The benefits of investing in peer-to-peer lending
Peer-to-peer lending is an attractive investment because it offers a number of benefits. First, peer-to-peer lending platforms typically offer higher interest rates than traditional banks. This is because the platforms are able to match investors with borrowers who are willing to pay higher rates. Second, peer-to-peer lending platforms typically have lower fees than traditional banks. This is because the platforms do not have the same overhead costs as traditional banks.
The risks of investing in peer-to-peer lending
The risks of investing in peer-to-peer lending are manifold. First and foremost, there is the risk of default by the borrower. If the borrower defaults on their loan, the investor will not recoup their investment. Additionally, there is the risk that the platform through which the loan was arranged may itself default on its obligations to the lender. This could leave the investor without any recourse.
How to get started with investing in peer-to-peer lending
Peer-to-peer lending is a type of investing that allows you to lend money directly to individuals or businesses. This can be a great way to earn a higher return on your investment than you would with traditional investments, such as stocks or bonds. To get started with investing in peer-to-peer lending, you’ll need to find a reputable lending platform. Once you’ve found a platform you’re comfortable with, you can start creating your portfolio of loans.
Final Thoughts
If you’re looking for a way to earn higher returns on your investment, peer-to-peer lending may be a good option for you. With this type of investing, you can earn interest rates that are much higher than what you would get from a traditional savings account or CD.
However, there are some risks to consider before investing in peer-to-peer lending. First, your money is not backed by the government like it is with FDIC-insured accounts. Second, there is the potential for fraud and default by borrowers. Overall, peer-to-peer lending can be a great way to earn higher returns on your investment. Just be sure to do your homework and understand the risks involved before getting started.
