Blog Invest Should I invest in peer to peer lending in 2021?

Should I invest in peer to peer lending in 2021?

date October 22, 2020 time 7 min read 1612 views

The average annual growth rates of 5-10% or more from P2P lending has attracted a growing number of investors. If you’re asking yourself, “should I invest in P2P lending?” Or is it safe enough to invest in P2P lending?

Perhaps a buddy explained it to you or you heard about it on the internet.

Maybe you’ve already been using it as an alternative source for quick loans at great rates.

More and more people people in the finance world are talking about P2P lending these days. Some studies project the industry to reach over $490 billion by the end of 2021.

So should you invest in P2P lending? We’re going to tell you a bit more about the industry with our P2P lending investment review.

Where you put your money determines how fast it will grow
Where you put your money determines how fast it will grow
(source: simplybusinessguide.com)

What is P2P lending?

Peer-to-peer lending is the transfer and fulfillment of loans between peers rather than from a large cash-holding entity like a bank. The P2P system is made up of three parties: the investor, the borrower, and the platform.

How P2P lending works for investors

On the investor side, you are the one providing the loan to the borrower. Generally you’ll take these steps:

  1. You register to a P2P platform and link your bank account.
  2. You then use the platform’s interface to find a loan that fits your desired interest rate, term, and risk tolerance.
  3. Your funds are then released from your account to fund your borrower(s) loan.
  4. You collect your interest either at set intervals (maybe once a month) or at the end of the term.

While this is generally how things go down, P2P lending has a lot of variations. We previously made a list of some of the top P2P lending platforms for investors these days.

Now onto the borrower side of things.

How P2P lending works for borrowers

Borrowers turn to P2P platforms because they often offer fairer rates than traditional lending sources like banks and they have alternatives to credit checks that can be damaging to credit scores.

Borrowers on P2P platforms generally go through the following process:

  1. The borrower signs up for the platform and links their bank account.
  2. The borrower requests a loan from the platform.
  3. The platform assesses the likelihood of the borrower repaying through either a credit check or some similar process. Some platforms let borrowers forgo the credit check if they secure their loans with collateral.
  4. The platform assigns the borrower options for investment terms, a risk rating, and the percentage of interest they will need to pay on the loan.
  5. The borrower then waits while the platform finds suitable investors.
  6. The borrower receives their loan and begins making repayments.

Types of P2P lending

P2P lending has two major categories: secured and unsecured. Here’s a quick side-by-side comparison of these two P2P lending types.

Unsecured P2P lending

Unsecured P2P lending is the more “traditional” of the types out there. Unsecured means that loan interest rates are given to borrowers based on their reputation similar to a credit score in traditional lending from banks.

Major unsecured lending platforms in the US like Lending Club and Prosper use credit scores to assess trustworthiness and assign rates and risk ratings to borrowers based on these. A trustworthy borrower may receive an interest rate of 5% APR, an untrustworthy one 32%.

As an investor you’ll need to choose how much risk you’re willing to take in exchange for high returns with unsecured loans. 32% interest sounds great but not if there’s a strong chance you won’t receive any of it back.

Secured P2P lending

Unsecured P2P lending can be profitable but it also comes with a sizable amount of risk. To prevent this risk, a growing number of platforms require borrowers to put up collateral. Collateral is any valuable asset that can be sold off to cover the cost of the loan if they can’t repay. A very classic example of a secured loan is one you get from a pawn shop.

But today, borrowers don’t even need to use physical assets to secure their loans. In the age of digital assets P2P platforms like MyConstant let borrowers use their cryptocurrencies to secure loans.

As an investor this makes your returns on a secured P2P platform much more, well, secured. If a borrower fails to repay then collateral is paid back to you immediately to cover your initial investment.

How much money can you make in peer to peer lending?

Small returns add up, just like the coins in this piggy bank
Small returns add up, just like the coins in a piggy bank (source: pexels.com)

Is P2P lending profitable? Absolutely.

The average return for P2P lending across the industry is between 5-10%.  That’s much better than any high-yield savings account and in line with what you could expect from most stock investments year over year.

How much money you can make in peer to peer lending is only limited by the capital available at the start of your journey towards financial freedom. While starting with a small amount like $1,000 or less may seem slow going, starting out early with any amount can really pay off down the line.

What are the pros and cons of P2P lending?

Leaving large sums of cash dormant is never a good idea, so what makes P2P lending so special as an investment path
Part of the reason why peer to peer lending is replacing banks is due to their great mobile integration (source: pexels.com)

Maybe you’re already sold by the potential profits, but there’s more to investment than that. Here’s some other reasons why P2P lending may be a good investment for you.

Pros of P2P lending

Less risk

P2P lending is usually a lower-risk investment option compared to others like stocks or real estate. However, some mainstream platforms like Prosper have variable risk because borrowers don’t use collateral. You’ll need to assess the likelihood of losing money to default yourself. Modern secured platforms like MyConstant or Nexo, however, offer fully-collateralized loans with a low chance of investment loss.

Liquidity 

While treasury bonds and real estate are often touted as two of the safest investment options, they sacrifice liquidity to achieve their stability. Your money usually has to either stay in the investment for a fixed period or until you can sell the asset.

If you need quick cash for a business opportunity or urgent expense but only have illiquid assets, then you’ll be in quite the pickle. In contrast, most P2P platforms have a secondary market or features that let you withdraw and deposit money freely.

Diversification

Good investors want to diversify their portfolios to reduce risk without compromising yield. That said, diversifying into certain areas could raise the level of active management required for your portfolio. For example, you can get into as many different stocks or bonds as you want but that’s just more time you’ll need to spend researching.

You may be okay with cutting down on family time and hobbies in favor of staring at stock tickers or finding tenants for your properties. But P2P loans offer a great way to diversify without a ton of extra research.

On traditional platforms, every loan is a new investment in a different borrower with varying risk and interest levels. And many platforms today offer a couple different investment options like crypto-backed loans, crowdlending, and loan origination.

Cons of P2P Lending

Default risk

As mentioned earlier, even on secured P2P platforms there is a chance of borrower default. While risk can be mitigated substantially by collateral, there are scenarios where even this system can fail. 

For example, if a customer uses a real-world asset to collateralize a loan, then the platform needs to go through a lengthy repossession process. This could be further complicated if a company operates across borders.

Digital collateral like cryptocurrencies makes it easier for P2P platforms to collect collateral, however their less stable value also presents a challenge. For more information, check out our blog on cryptocurrency collateral.

Growing pains

As P2P lending is a relatively new industry happening entirely online, it has presented some regulatory challenges to countries still operating under a classic financial system. Many platforms, especially those working with crypto, operate in regulatory grey areas and may not always have smooth transfer procedures especially across borders.

So how safe is P2P Lending?

As you can see, P2P lending has a lot of different options available to you at a wide range of risk levels. While any investment comes with a degree of risk, many P2P platforms have found increasingly better ways to minimize the chances for investor losses.

As with any investment, your best bet for safety is to diversify. Try placing a bit of your money in a couple different platforms. Once you see how their process works and you become more comfortable you can start investing further.

Should you invest in P2P lending?

If you like steady interest with reasonable risk and a large degree of diversification, P2P may be right for you.

But as with any investment strategy, you need to know a few things about yourself before you get started.

  • Do you have a financial cushion/liquidity? You shouldn’t empty your entire bank account into any one investment. If all your assets are tied up in unpaid loans it could be sticky if an unexpected expense comes up, and you don’t have the cash to cover them.
  • What’s your risk appetite? Investors are drawn to P2P lending due to its consistent returns. And while P2P doesn’t require the consistent research of stock trading you do need to do your reading in the beginning. Risk can vary drastically from platform to platform and loan to loan.

Get started with P2P platform with the most options

Hopefully you’re convinced you should try investing in P2P lending. But there are many platforms out there today. Which should you choose?

If you want a little bit of everything for your peer to peer investing platform, you should give MyConstant a try.

We provide a wide range of investment products of varying liquidity with rates between 4-9%

MyConstant’s crypto-backed loans range from 1-6 months with rates from 6-7% APR. You can lend either USD or crypto directly to individual borrowers for a fixed term. 

Our anytime withdrawal investment account allows you to invest into an investment pool for 50x better interest than a savings account. As the name implies, you can withdraw any amount at any time with no extra fees.

And you can even lend your cryptocurrencies like BTC, BNB, and ETH for up to 9% APY with our Crypto Lend feature. Our goal is to make P2P lending as accessible and safe as possible. Come see what we’re all about today.

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George Schooling

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