Peer to peer lending is just how it sounds. You, as the investor, supply borrower’s money. In return for generously funding their loan you earn interest. And depending on who you loan money to this interest can be quite high.
It’s not all sunshine and rainbows though. Here are both the pros and cons of peer to peer lending.
The Pros of Peer to Peer Lending
I think we need to start with the pros to get an accurate look at just how this works.
As an investor you get to loan money out to borrowers of your choice. Borrowers are rated by the peer to peer lending company by their credit score, income, and overall financial stability. The better rating a borrower has the lower interest rate they’ll receive.
Now you get to pick: do you want to loan to high risk borrowers or do you want to stay on the safer side? (You can also loan money to businesses.)
On top of that you can diversify your portfolio by spreading the risk across several borrowers. By doing this you’ll mitigate your risk of being completely stiffed on the loan. And the best part is that you can normally do this with amounts of money as low as $25 dollars.
Another pro is that your return on investment can often exceed what you would get by investing in the stock market.
And since borrowers typically turn to this type of loan because they aren’t able to get funding through a traditional bank, they’re likely to pay off their loan so that they can come back.
The Cons of Peer to Peer Lending
There’s a risk with all forms of investments.
Particularly, with peer to peer lending you have to worry about borrowers defaulting on their loans. In this case you can kiss all of your hard earned money bye.
To avoid this you need to spread the risk through several borrowers.
If you’re too aggressive and invest only in high risk borrowers you might find yourself in a lot of trouble.
How to Get Started
If you want to get started with peer to peer lending you can sign up through a site like the Lending Club or Prosper.com
After you create an investor’s account you’ll be able to loan money to borrowers based on your risk tolerance. Start small until you’re comfortable with the platform and go from there.
It’s also important to note that not everyone is eligible to participate in peer to peer lending.
Unfortunately it’s banned by some states, which is my case in Ohio. Do a quick Google search to see if you can become a peer to peer investor before trying to open up an account.
Overall peer to peer lending can be a great investment but it does come with its own set of risks.
Have you tried P2P Lending? What are your thoughts on it?