Peer-to-peer lending (or P2P lending) is a brilliantly flexible way of making a higher return on your money than you get in the bank, and a way to diversify your investments from shares and bonds. I strongly recommend you read this entire article before deciding if peer-to-peer is right for you. In subsequent posts, I will share details of the platforms I’m investing with right now; for now though, here’s a quick summary to give you an idea of what’s possible with peer-to-peer lending.
In its simplest form, peer-to-peer is just lending money to another person (or business) without a bank getting involved in the middle. Peer-to-peer lending is often confused with crowdfunding but they are very different investments.
It’s clear to see why this is attractive. Normally you put your money in the bank, the bank gives you about 0.5% per year if you’re lucky, then they lend it out for much more. Without the bank taking a big slice in the middle, you get a higher rate of return. You still need someone in the middle bringing both sides together and facilitating the process, and that’s where peer-to-peer platforms step in.
At first, lending money directly to another individual might sound risky: what happens if they don’t pay you back? In practice though, you’ll spread your money across lots of different borrowers – so even if one doesn’t repay, you’ll only lose a small amount.
The attraction of P2P is that it scores highly on three different measures: safety, liquidity, and interest rate. Let’s take the basic case of leaving your money in the bank. It’s safe (in theory) and liquid (you can access it any time), but the rate of interest is either low or non-existent. Alternatively, you could invest it in a property. It’s still relatively safe (properties tend to hold their value over the long term), you can get a high return if you buy well, but it’s illiquid: if you want your money back, it takes time to sell the property.
P2P lending scores well on all three: it’s relatively safe and relatively liquid, while still attracting a relatively high rate of interest. If you split your money across multiple borrowers you have negligible risk of major loss, you can quickly sell loans (under usual market conditions) to get your money back, and the interest rate is a lot better than you’d get in the bank.
What interest rate can you get? At the moment, I’ve got money invested in P2P platforms earning anything from 4% up to 17%. The main difference depends on what the platform uses the funds for.
Is peer-to-peer investing lot of work? Some platforms let you pick individual loans, whereas others hide all that away: you put money into the platform, then they spread it across different loans behind the scenes. There are also platforms that give you a choice: you can either pick individual loans, or automatically invest a certain amount into every new loan that comes up until you reach your limit.
There are three main “flavours” of peer-to-peer lending:
· Lending to consumers
· Lending to businesses
· Lending against property
Some platforms will offer all three types of lending, while others focus on just one. You don’t need to know about this in masses of detail, but it’s helpful to get a sense of how your money could be used – and what the risks of each type are.
What I am reading now:
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