Do you want to learn how peer to peer lending for investors is an insanely easy way to make money?
What if I told you peer to peer (P2P) lending was a simple stock market alternative, where you didn’t have to worry how the DOW Jones performed?
Imagine seeing a steady return on investment year after year.
Wouldn’t you like a simple investment strategy that didn’t crash and was easy to understand?
Luckily for you, that’s exactly what I’m going to show you today. Peer to peer investing is one of the simplest ways to make steady money and is beginner friendly!
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So what is Peer to Peer lending?
As I’m sure you’re aware, life takes money and people are always looking to borrow money. You might need a loan for a mortgage or to consolidate student loan debt. Maybe your family is looking to do a major home improvement, but are a little short on cash.
We need to borrow money and the most traditional way to borrow is through a bank.
However, some people would rather not borrow money from a financial institution. Other people have bad credit which makes the loan interest unbearable!
Peer to Peer lending is the solution that helps every day investors earn money while helping families in need.
I can invest my extra money in a family looking to buy their first home. This family may have bad credit due to extensive student loans. Either way, we both win as the family can purchase their home while I earn interest on my unused money.
So how do you profit with Peer to Peer investing?
So how do you actually profit through investing with a Peer to Peer network? The process is similar to how banks earn their money, only in this case, you’re the bank!
It starts with a family wanting to borrow money who approaches a Peer to Peer company. The P2P lender begins a risk evaluation. The risk evaluation considers the families current debt, income, expenses, amount to be borrowed, credit score, loan term, and the purpose of the loan.
The Peer to Peer company assigns the loan a risk score, typically in alphabetical form. Lending Club uses a risk A through D, A being less risky and D being most likely to default.
Next, the P2P network begins a loan crowdfunding period where investors invest capital (money) into each loan. Each investor purchases a portion of the loan until the loan is fully funded.
Once the loan has been funded, the family receives the money and makes monthly payments to the P2P lender. The P2P lender then deposits your earned interest (for investing your money), back into your account with each payment.
It’s that simple. As an investor, all you need to worry about is choosing loans that meet your risk criteria. Once your money is invested, your money and interest is paid back over the life of the loan.
How much money do you need to start P2P investing?
The first thing you should understand before investing in Peer to Peer lending is the note system. A note is simply a fraction of a loan that you can own.
Most notes are sold in $25 increments. So for a $1,000 loan there would be 40 notes available ($1,000 / $25). So technically, you only need $25 to get started investing!
But wait! Before you start checking your couch cushions for cash, there’s more.
Notes allow you to own a small fraction of a loan, so that you can spread your money across multiple loans easier.
Notes are also broken up into letter grades, such as Lending Club’s A through D system. A notes are less risky and less rewarding, while D notes are more risky with more potential reward.
These notes are further broken down with a 1 through 5 numbering system. Therefore, A1 notes are less risky than A5 notes.
Lending Club also mentions that 99% of investors that own 100 notes or more see a positive return on investment. Diversification is key when it comes to peer to peer investing.
Therefore, it’s recommended that you start with a minimum of $2,500 and diversify your note portfolio.
What are Peer to Peer lending returns?
Peer to Peer lending returns are expected to be anywhere from 4-7 percent. Lending Club historical returns are between 4-7 percent while Prosper averages 5.3 percent.
Money Under 30 confirms average returns of 5 percent after investing $20,000 with Lending Club.
However, one of the benefits to peer to peer investing is that you can select the loans you want to invest in. Creating a investment gradient across multiple risk levels (e.g. A, B, C, and D), you can create a higher return on investment.
So what does 5% return on investment look like? According to Dave Ramsey’s retirement and investment calculator, A $1,000 investment grows to $3,341 over 30 years!
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What are the best Peer to Peer lending sites?
Both Prosper and Lending Club are very similar Peer to Peer lenders. Prosper and Lending Club use a Note system, let borrowers borrow around $40,000, and have loan terms of 36 and 60 months.
Similarly, both lenders average an annual return of about 5 percent. Doesn’t sound like much of a difference, does it?
However, there is one small, but very important, factor that separates Prosper vs. Lending Club. Loan default rates are significantly different between the two lenders.
What does it mean to default on a loan? Loan defaulting means a family or individual failed to pay their loan, claiming they cannot pay it off.
What does loan defaulting mean for the investor? When someone defaults on a loan, the investor will be unable to regain their money invested. Unfortunately, the borrower took the money and is refusing to pay it back.
Lending club has significantly worse default rates than Prosper. Therefore, Prosper is the safer option for Peer to Peer investing.
According to Forbes, Prosper default rates range approximately 1.5 to 17 percent compared to Lending Clubs 6 to 33 percent.Click to Tweet! Please Share!Click To Tweet
What are the risks of Peer to Peer lending for investors?
As you may have already guessed, Peer to Peer lending for investors isn’t completely risk free. You can generate higher than normal returns through Peer to Peer lending, which normally indicates increased risk. Keep the following in mind before investing with a Peer to Peer lender.
Higher default rates
As we’ve already discussed, default rates can be as high as 30+ percent. Loan defaults can cause you to lose money on your investments.
Manage your risk by spreading your investments across a variety of loans (multiple notes) and risk levels to create a diverse portfolio. Remember, 99% of Lending Club investors with 100 notes or more see a positive return.
It is unknown what would happen with default rates through a recession. I would assume that a recession would cause default rates to increase.
Little to no liquidity
Unfortunately, investing in Peer to Peer lending provides little to no liquidity. Like Real Estate, your money is invested in an asset and cannot be sold immediately.
Stocks are a liquid asset. You can buy and sell a stock with the click of a few buttons.
Lending club does allow you to sell your notes to other investors, but it can take some time to do so. You should always keep an emergency fund and hold some liquid assets.Click to Tweet! Please Share!Click To Tweet
Should you invest in Peer to Peer loans?
Everyone’s situation and risk tolerance is different. Generally speaking, Peer to Peer lending for investors can be a good addition to your investment strategy. However, P2P shouldn’t be your main focus.
As an investor, you should continually look to diversify your portfolio. Keep some money in Peer to Peer lending. Don’t ignore Real Estate, Stocks, Bonds, Money Markets, CDs, ETFs and Mutual Funds.
Summary: Peer to Peer for investors
Here is what you need to know about P2P investing.
- P2P investing is similar to how banks make money. However, there is no bank fronting the money for loans. You invest your money with families in need.
- As an investor, you make your money through interest. You’ll earn your interest as loans are paid back.
- Loans are split up into Notes, generally in $25 increments. Each note is assigned a letter indicating risk and reward. “A notes” tend to be less risky and less rewarding than a “D note.” Purchase multiple notes across different loans to diversify your portfolio.
- Investing starts with as little as $25, but it is less risky to invest $2,500. Lending Club reports most investors see positive returns when they purchase 100 or more notes.
- Prosper is the best P2P lender. Lending Club has a higher default rate than Prosper, making it a riskier choice.