Blog Invest Peer to Peer (p2p) Investing Vs. Stocks, Bonds, and Mutual Funds

Peer to Peer (p2p) Investing Vs. Stocks, Bonds, and Mutual Funds

date October 23, 2020 time 8 min read 884 views

You may not have heard of peer-to-peer lending investments, but they’re becoming an increasingly attractive way to grow your money. In this guide we’ll compare peer-to-peer investment with more conventional options and see how they stack up.

Investing can be intimidating. Meeting with a financial planner or speaking with a banker can sometimes put people off (even though it shouldn’t). 

Nowadays, though, options like peer-to-peer lending (P2P lending) investments have removed the middle-man and have made investing in people accessible to everyone!  

P2P lending offers a simple investment process along with impressive returns. But should you invest in peer to peer lending? In this guide we’re going to run it head-to-head with traditional investments (stocks, bonds and mutual funds) to see how P2P lending stacks up.

First, let’s find out what P2P lending is all about. 

Is P2P lending better than traditional investments?
Is P2P lending better than traditional investments? (source: lendenclub.com)

Peer-to-peer lending explained 

P2P lending allows you to directly receive interest from money loaned to borrowers. It’s a terrific option if you want to see steady returns, but not have your money locked away for years on end. 

Interest rates & investment period 

As with other investments, interest rates on P2P platforms can fluctuate depending on the market. As of now most platforms interest rates are around 6% APR

The rate, however, can change depending on how long you hold your investment. On MyConstant, for instance, you can invest for periods 1, 3 or 6 months from 6 to 7% APR

If you find that you need to end your investment period early, most platforms allow you to sell your investment on a secondary market

Risk & liquidity 

When P2P lending first came on the scene in 2005, it was considered as a high-risk investment. Mostly because the loans given out were unsecured (think: borrowers defaulting). Fast forward 15 years, and things have dramatically changed. 

Platforms like MyConstant offer loans that are backed up to 200% with liquid-collateral — making the loans significantly less risky. If a borrower defaults, the collateral is sold off and the investors lose nothing. 

Accessibility & minimum investment 

You don’t have to enter a bank or speak to a financial advisor to invest on a P2P platform. In fact, P2P lending is accessible on your smartphone. Download the platform of your choice, send your funds and begin investing.

Every P2P platform has a different minimum investment. On MyConstant for example, the minimum you must deposit is $50.    

Now that you have an understanding of what P2P lending is, let’s see how it stacks up against three of the biggest classic investment options.

Peer to peer lending vs stocks

We’ve all heard about how much you could  have made if you’d invested in Google or Amazon in the early days — but does the average stock beat returns from peer to peer lending?

Just to recap, a single share of stock represents a fraction of ownership of a company. The amount your stock is worth increases/decreases with the value of the company. This is why if the company increases in value, you can earn big money by selling the stock — but you’ll lose everything if it goes bankrupt or has a couple of bad years.

Peer to peer lending investments are more stable than stocks
Peer to peer lending investments are more stable than stocks (source: quoteinspector.com)

Interest rates & investment length

It’s almost impossible to know for sure if a stock will increase or decrease in value — a factor that adds to the excitement of investing in stocks. For example, Norweigan Cruise Line stock has decreased more than 72% in 2020 alone, whereas Amazon rose around 50% in the same period. 

Average returns on the market fall somewhere in between but you don’t always know for sure. There’s no specific investment length for a stock. You can hold for a few moments or your entire life.

That puts stocks at a much higher year-over-year risk than P2P lending.

Risk & liquidity

It’s possible to lose a lot of money through stocks if a company has a bad few years or even goes bankrupt. You can sell a stock whenever you want as long as there’s demand — the only restriction is that you must sell during trading hours (usually between 9:30 am and 4 pm EST).

P2P platforms are often more inaccessible while you’re in an investment but a growing number of platforms (like our own) now offer anytime-withdrawal options.

Accessibility & minimum investment

Stocks can be bought and sold privately or on the stock exchange. But this is sometimes easier said than done. In fact, professional brokers spend years studying the market and even they can’t predict the future of a stock. 

This is why starting out investing with stocks can be tricky if you don’t know what you’re doing. 

While at one time stocks were only accessible through brokerages, many apps now let you trade for free. There’s rarely a minimum investment for stocks — most trading platforms today even let you buy fractional shares (a portion of a share’s full value).

This puts them, in many ways, neck-and-neck with some of the top P2P platforms in terms of accessibility.

Peer to peer lending vs bonds

A bond is effectively a loan to a government or company that gives a fixed return, but interest rates are generally very low.  Bonds are often suggested as a great low-risk way to invest, but they’re no longer what they once were. We’ll explain why in this peer to peer lending comparison.

Government bonds are generally safer than most investments, including P2P lending
Government bonds are generally safer than most investments, including P2P lending
(source: wikipedia.org)

Interest rates & investment length 

There are many different types of bonds that offer different lengths until maturity, interest rates and risk. Generally speaking, the lower the risk, the lower the interest rates. 

For instance, the safest short-term bond would be U.S. Treasury bills. In second place would be Municipal bonds which are issued by cities and localities — they give you better returns, but are a bit riskier. Finally, you have corporate bonds issued by companies — they have the highest risk, but pay the best interest rates. 

The rate can be between 0% to 10% — but currently, bonds rarely go over 1.5%. Considering inflation is around 2% a year, this results in a net loss. Also, bonds typically have a long commitment period between 3 to 5 years.

P2P rates are similar to bonds in that the longer you invest for, the better rate you get. Compared with bonds. However you can get a great rate with P2P lending and not have to lock your money away for years at a time.

Risk & liquidity 

Remember: the lower the risk, the lower the returns. Returns are low for bonds because they’re a safe investment

For legal reasons, governments and corporate borrowers are more likely to pay you back. The biggest risk is that the money you invested will be worth less after the term is over due to inflation. The rates of your bonds can also fluctuate a bit over time. 

Bonds can be sold on a secondary market with a good degree of liquidity. That said, selling a bond could take one day or up to a week. 

Compared to bonds, with P2P lending, you don’t have to sacrifice profit for risk. Platforms like MyConstant back all investments with liquid collateral. And if you ever need access to your investment you can sell it on the secondary market. 

Accessibility & minimum investment 

Bonds can be a good option for beginners since they’re low risk, but choosing between them requires a great deal of research. 

Non-accredited investors also are limited in the types of bonds they can purchase. Bonds also have a minimum threshold, but it can be a lot higher — often between $1,000 and $10,000. 

The initial investment accessibility of a bond and a P2P investment are similar, although a growing number of P2P platforms offer low minimum investments.

Peer to peer lending vs mutual funds

Because they are run by more experienced investors, mutual funds can be a less intimidating way for beginners to invest.

These funds are put together by wealth management companies to give you a managed and diversified portfolio. Typically, these portfolios contain a range of assets like bonds, stocks, and even real estate — usually from various countries. 

After you create an account, your broker will prompt you to choose from a range of these funds. You can either put all your money into a single fund or spread it across multiple ones.

Mutual funds vs peer to peer lending: How do they compare? (source: enterslice.com)

Interest rates & investment length 

The average returns on mutual funds are between 7% and 12% — but you may also get a negative return if the market performs poorly. Mutual funds don’t have a set term you must agree to — you can sell them whenever you want as long as markets are open. However, most people advise investing in mutual funds with the expectation of holding long term. At least three years.

By all accounts, interest rates on mutual funds are impressive. But your investment is put at risk if the market tanks. While a P2P investment might give you a lover interest rate, you can rest assured that you won’t usually lose money based on a fluctuating market. 

With a mutual fund, it’s also advised that you hold it long term. So if you’re unsure how often you need access to your investment, P2P lending is the better option here.  

Risk & liquidity 

Mutual funds are riskier in the short term since stock market volatility affects them more. However, because they are well-diversified and managed by professionals the chances of losing everything are low. Mutual funds generally can only be sold at the end of a trading day. That means there is some fluctuation in the sale price.

Compared to mutual funds, P2P investments have a higher degree of liquidity because you can sell an investment on a secondary market at anytime. Also, because the value of mutual funds relies on the stock market, they’re a much riskier investment than P2P. 

Accessibility & minimum investment 

If you want to begin investing in mutual funds, you just need to open an account with a broker like Vanguard or E*Trade and choose a fund to invest in. 

Sometimes these brokers do cost a small fee though. Some mutual fund providers have a minimum investment, but it’s usually quite low — between $500 and $2,000 (or occasionally more for more exclusive products).  

While investing in a mutual fund may cost you a small fee, investing in P2P lending is free. P2P lending also has a lower minimum investment. And remember, withdrawing your funds from your MyConstant Flex account is always free of charge.

Invest P2P with MyConstant today and experience P2P at its best

Stocks, bonds and mutual funds are all great investment options, but P2P lending may be a better option today.

One of the easiest ways to get started in P2P lending is through MyConstant. Our crypto-backed loans offers returns of 6% for a term of just 30 days — or 7% for 180 days.

We even have a no-minimum-deposit crypto-backed account with a rate of 4% and anytime withdrawals. All investments are collateralized so you don’t have to shoulder defaults.

Create your free account today and see how you can do more with your money today. 

Disclaimer: The content in this article is intended for educational and discussion purposes only. While we’ve done our best to ensure that the information is accurate and up-to-date, it’s important that you complete your own research before investing or entering any agreement. 

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George Schooling

George Schooling

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Tags: should i invest in p2p lending peer to peer lending investment peer to peer lending vs bonds peer to peer lending vs stocks peer to peer lending vs mutual funds

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