Is Peer To Peer Lending A Good Investment Idea? Comments26 Comments

peer-to-peer-investing

Hey everyone, Josh here again, and thank you for joining me for this week’s Monday Money. I’ve been on a big investing kick since I started investing myself a few months back. I’ll tell ya, I should have started this much sooner. Anyway, I’ve been strolling along on several different blogs and I keep seeing the peer to peer investing idea pop up. So, I figured I’d chat about that a bit this week and see how it turns out.

What Is Peer To Peer Lending?

Have you ever let a friend or family member borrow money? Well, that’s a small form of peer to peer lending. One of your peers needed money, you offered a loan. Well, this idea has given way for an entirely new industry. There are millions of people out there that want loans, but don’t want to deal with banks. These people are willing to pay competitive interest rates, make monthly payments, and do what it takes to keep the loan in good standing, at least in most cases. So, if another consumer were to fund that loan, they could potentially make a good amount of money in interest.

I Don’t Know Enough People That Need Money For It To Be Worth My Time!

Well, you may not know them, but they’re out there. You don’t have to look to far either. Because there is such a high demand for services like this, there are tons of websites out there that allow you to offer these loans. One of my favorites is Prosper. Among several other reasons I love them comes the fact that they have so many loans available for funding!

Is Peer To Peer Lending A Regulated Market?

When you invest in the stock market, you know that there are rules and regulations that help to safeguard your money. So, looking into new markets, it’s definitely understandable to want to make sure that they are regulated as well. However, when it comes to peer to peer lending, there’s no big S.E.C. watchdog keeping an eye on heavy hitting players to make sure everyone follows the rules.

However, to an extent, that’s a good thing. The truth is, when things become regulated, they become more expensive both for the business and for the investor, or in this case, the borrower and the investor. That’s because new regulations take time to tend to, and we all know that time is money! As long as people remain civil about peer to peer investing, keeping it unregulated will help to keep costs down.

How Big Of A Risk Does A Peer To Peer Lending Investor Take?

Well, that really depends on the investor. They can choose to fund riskier loans or they can choose to stay on the safer side of the margin. However, as with any loan, there is a risk of loss. Let’s face it, a consumer could potentially borrow thousands of dollars and not pay back a dime. Leading to a huge loss for the borrower. On the other side of the coin, a business could technically go out of business a month after you invest in them and you can lose all your money that way too. The key to any form of investment is diversification. That being said, no matter if you’re investing in the stock market or you’re investing in peer to peer lending. As long as you maintain a diverse profile, you greatly reduce your risk of loss.

Resolving Some Myths About Peer To Peer Lending

Myth #1: It Takes Forever To Find Good Loans: The reason most of the people I’ve talked to have decided against peer to peer investing is that they don’t have the time it takes to find good loans to fund. The truth is, with a good program, it doesn’t take much time at all. With an option like Prosper, you’re given an online platform that makes finding loans worth funding a piece of cake. Because they have so many people looking for and funding loans in their system, no matter what you consider a quality offer, you’re sure to find tons of them with a simple and quick search.

Myth #2: Peer To Peer Lending Is Too Dangerous: If you’re saying this, you obviously haven’t seen any of the collapses in the stock market. The truth is, any form of investing is dangerous. However, there are always ways to decide how much risk you’re willing to take. If an investment seems to risky, don’t take the risk. Also, diversifying your investments in any setting will always alleviate the risk of investing. The bottom line is, peer to peer lending isn’t too risky, it’s just a new concept that many people are afraid of.

Final Thoughts

No form of investing is a perfect answer for everyone. Each different investment concept comes with it’s own risks and rewards. However, peer to peer lending is a great idea for tons of investors. To find out if it’s right for you, I suggest a small test investment. See how it turns out and make an educated decision after a viable test.

Reader Question

Have you ever taken part of peer to peer investing? If so, how’d you like it? If not, would you consider the option?

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By : Josh Rodriguez | 18 Nov 2013
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26 thoughts on “Is Peer To Peer Lending A Good Investment Idea?

  1. MoneyAhoy

    I don’t think it’s too risky. Also, the SEC doesn’t really “watch” the stock market for most of us common folks anyways… They’re out there to catch the big crooks, and it seems that lately they have a hard time making cases stick.

    Reply
  2. Thomas

    I use Prosper and think its a great way to make some money. Personally think it adds value to your investment strategy. Not for everyone but nothing is.

    Reply
  3. Deacon Hayes

    I have only done “peer to peer” lending in person, not online. But in my experience, lending money to friends is a bad idea. I have had friends not pay me back, or if they did, it took a really long time. Perhaps the online lending platform has safeguards for that, but I think I will stick to index funds for my investment strategy.

    Reply
  4. Christine @ ThePursuitofGreen

    I haven’t tried out peer to peer lending but I hope to one day! I need to start up stock investments first with some nice ETF’s, then I’ll take a look at peer to peer lending. If I have enough cash flow to go round of course. I understand stock investments more than peer to peer so for me it feels safer. Plus I can Vanguard, which I already have my retirement accounts with, which simplifies it all.

    Reply
    1. Joshua Rodriguez

      Hey Christine, thanks for swinging by. keeping investments as simple as possible is important. And, investing in what you know will always be safer. However, I will say, dabbling in peer to peer lending may just earn you more on the return side of things!

      Reply
  5. Sumit Sinha

    What concerns me while investing in P2P lending space is that unlike stocks where you can choose a fundamentally strong companies that have strong competitive advantage such that they won’t go out of business all too easily, the chance of someone going default in this case is pretty high.

    Of course, one would be a fool to commit a large sum of money to just one person, but even with proper diversification, the risk of eroding your capital is very high. This is simply because while it is in the interest of the management of a company to keep it in the business, it is against the interest of borrower to pay the lender (when in fact, he can easily default).

    I may be a bit misinformed here, but I would really like to know the incentive for a borrower (beyond obvious goodwill) to pay the loan in full? Why should we trust a borrower with our money other than for our faith in humanity?

    Reply
  6. Micro

    I should have my account with Lending Club at about $2500 by the end of the year. At that point, I’m going to let the portfolio mature to get an accurate idea of what the returns are long term. According to Lending Club’s website, my portfolio will be at the minimum threshold needed to exerience a positive return. How much remains to be seen. If the account does well, I will probably invest additional money.

    Reply
  7. Brian @ Luke1428

    Seems to me this type of investing would be down on the food chain a bit. In other words, not the first place I’d put money. Maybe after all my other traditional means had been exhausted and were well established.

    Reply
  8. Andrew@LivingRichCheaply

    I have a small amount invested in P2P lending with lending club. One thing that I am not sure about is its liquidity. It’s not like a stock where I can just easily sell it. I know there is a secondary market but I’ve never tried it.

    Reply
  9. Bryce @ Save and Conquer

    I had an account with Lending Club to the tune of $10k. I didn’t lose money, but was not all that thrilled with the returns. I had many loans that defaulted through the Great Recession. The biggest problem I had was that it took a long time to cash out. The loans have a 3 year duration, so that is the minimum amount of time to get all your money back. There were also some payment negotiations, so it took 4 years to get all my money back out.

    Reply
  10. Matt Becker

    I think p2p lending may turn out to be a fine investment but the people who think it’s a magic source of high returns with low risk are mistaken. The reality is that it’s very young and has yet to really be tested, but at the very best it will provide risk and return at the same relative levels as anything else.

    Reply
  11. JoeTaxpayer

    And just when I see the opportunity to diversify, I find my state doesn’t allow peer-to-peer lending. Both Lending Club and Prosper are a no-go here. (Massachusetts)

    Reply
  12. Bobby @ Making Money Fast and Slow

    You have to be very careful with who you lend money to. The same way banks check your credit score, you need to make sure the p2p borrower will be able to pay back the loan. Although you can get higher returns, I still prefer the safety of my index funds.

    Reply
  13. Fehmeen

    I’m all for peer-to-peer lending/borrowing as long as the loans charge lower interest rates compared to banks, though there are many people who are willing to lend without any interest charge, and I would personally vouch for those loans. Peer-to-peer platforms are just about as risky as stock markets but the model is much simpler so more people would adapt to it.

    Reply

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