As an investor, you may be sick of the turmoil in the traditional financial markets and looking for alternative forms of investment that can provide decent returns.
Alternative investments are considered “alternative” for a reason — they often have limits to their upside, are illiquid, or have an entire set of risks that isn’t fully understood yet.
One area that you may want to take a look at is peer-to-peer or P2P lending. If you have cash that you won’t need for the next three to five years and you’re comfortable with a little bit of risk, this can be a good place to put your money. Of course, there are mainstream alternatives, as we’ll discuss below.
What is P2P Lending?
With P2P lending, you essentially become the “bank” that people borrow from. People who need money can borrow it from you and then pay you back with interest. If you’ve paid any attention to the economy lately, you know that it is difficult for people to get loans from traditional banks — and for good reason, as economic difficulties are also putting more people out of work.
Having a perfect credit history doesn’t matter much if you literally don’t have enough income to pay past-due bills.
Of course, people still need to borrow money to refinance their loan from when they decided to buy a house, or they might need the money to fund some sort of project.
As a peer-to-peer lender, you fill the role of the lender where other traditional lenders may not be willing to go — or where they charge too much interest compared to what p2p lenders are willing to charge.
Peer-To-Peer Networks
Most people don’t set up peer-to-peer deals on their own. Instead, they go through a peer-to-peer lending service or network.
There are a number of services that you could use to facilitate these deals. Most of these websites allow you to register as a lender and then transfer money into an online account.
The two most popular platforms are LendingClub.com and Prosper.com.
You can then see profiles of people who want to borrow money. The peer-to-peer lending service will get the credit history information of the borrower and give you a general idea of what to expect. Then you can decide to extend a loan to a particular borrower.
At that point, the peer-to-peer lending service starts taking monthly payments out of the borrower’s bank account and transferring the money to you. This means that you don’t have to worry about the administration of the personal loan.
The biggest problem — especially for me — is that they’re not open to investors in every state because of different state financial regulations. Because of this, it’s literally impossible for me to currently invest in P2P loans, though I plan on putting a portion of my portfolio toward them whenever it becomes legally available in my state.
Returns
The returns that you can earn from P2P lending vary, but are generally strong. You could expect interest rates somewhere between 4 percent and 15 percent, depending on the quality of the loans. Of course, some loans could default, meaning it’s possible you could lose your entire investment. The rates will vary based on the loans that you take on.
The best review of the different returns from the two main P2P platforms is from SocialLending.net.
Considerations
These loans can provide a great income on top of retained principal for investors — maybe. It depends almost entirely on the strategy used and how you sort through the different loans.
The downside to these loans is that they can be a bit risky. As long as you’re comfortable with risk, peer-to-peer loans can be an exciting way to earn returns on your investment.
How to Invest Like a Bank: P2P Lending Returns is a post from Stand Strong Research.
