Invest Money

Invest in Peer-to-Peer loans

This is the oldest way to “make money work” reinvented.

Ever since money was invented there has been people who need money and people who have more money than they need. Seeing this reality it didn’t take long for the rich people from ancient civilizations to figure out they could benefit from this situation by lending their money under the promise that after a certain period of time they would receive back the amount they lend plus a little extra (later called interest).

In modern times lending and borrowing money has been usually restricted to banks. Other than the occasional family and friends’ loan, if you are looking for money banks are the only option that comes to mind.

But then the internet came into the picture, and after a few years hypothesizing about the possibilities of this new medium companies started challenging the way things were done up until then. First it was the music industry, then the travel industry, shopping, logistics… and most recently, banking.

Since 2005 the internet became a place where people could lend money to each other in what is now known as peer-to-peer lending.

So if you have some extra money that you are looking to invest you can now choose to lend it to someone who needs it and get it back over a certain period of time with interest.

What’s even better is you don’t even need to lend that person all the money they need. Imagine someone wants to borrow $10K, but you only have $500 to invest. That’s ok because most P2P lending platforms are also crowd-loaning platforms, which means other people can join you with different amounts until combined you reach those $10K and therefore the applicant gets the money he or her needed.

How much can you earn investing in P2P loans?

Most peer-to-peer lending platforms rate the loans in which you can invest your money based on several variables to give it a final rate that indicates the risk involved in lending money to that particular person. These ratings consider things like the reason why the applicant is asking for a loan, their credit score, how much money they make, their education, age and more. As you would expect, high risk loans will earn you a higher interest, whereas lower risk loans will yield a lower interest.

Interest rates for peer-to-peer loans usually range from 5% for the low risk to 12% for the ones considered high risk.

If you consider that the highest saving accounts are paying an interest of 2.5% peer-to-peer loans become all of a sudden a very attractive, low time consuming, investment option.

Risks and limitations of P2P loans

Peer-to-peer lending comes with some risks and restrictions though. The risk is clear. If the person you lend your money to gets sick, hurt, gets fired, bankrupt or simply decides not to pay you’ll lose all the money that was left to pay on that loan. The restriction is that if you invest your money in a three-year or a five-year loan that is how long it will take for you to recoup your investment, there is not getting out early.

This however is something that you should be aware, but it shouldn’t scare you. Many investments come with a strict deadline attached, and there are easy strategies you can follow to minify your risk.

Different platforms will give you different information on the loans you can invest in, and one can easily get emotional about it if you see a young entrepreneur who needs a loan to start a business while getting themselves to college by working two jobs (or whatever it is that touches your moral fiver). However investments usually work best when you remove motions from the equation. Imagine you want to invest $1000 into P2P lending. You can choose to invest $1000 into one single loan or $100 into ten different loans. If all loans have the same interest and they all pay back there is no difference between these two approaches, however in the first scenario if that person fails to pay back the loan you’ll lose all your $1000, whereas in the second case if a person fails to pay you’ll only loose $100.

Which are some good platforms to invest in P2P loans?

Ever since the first peer-to-peer lending platform appeared in 2005 others have followed, each trying to add their own edge to what’s essentially the same model. Before investing you should research which of these platforms will work best for you. Some things you should be looking for are minimum loan amounts (which can be as low as $25), minimum deposit amounts (even though you might be allowed to loan as little as $25 you might be required to open your “loaner” account with a higher minimum), commissions and withdraw fees.

You are encouraged to find more extensive articles and reviews before making a decision, however these are some peer-to-peer platforms which might be good to get you started in that research:

  • Prosper
  • Lending club
  • Peerform
  • Upstart