Interest rates on saving deposits represent negative growth when inflation is taken into consideration, thus many are searching for a higher return on their money. Peer to peer lending is a relatively low risk solution for individuals to receive a higher yield on their savings and will most appeal to those who like to have a tight control over their finances, rather than hand the management over to a third party.
Investing in stocks can be great fun but it requires a higher amount of money to invest as an individual than peer to peer lending does. Instead of committing $1000 to one safe stock and receiving a dividend whilst hoping the stock rises to sell for a handsome profit, peer to peer lending allows you to diversify the same $1000 across up to 40 small loans. The charges are typically just 1% of your investment, representing an excellent investment.
Alternatively one can invest in a range of stocks through a fund, but they tend to plod along and you don’t have the opportunity to pick each one individually. Peer to peer lending gives you the chance to identify which borrowers you choose to lend to, and make an individual assessment of risk. Any small investor who likes to keep control of their financial decisions should be well served by considering peer to peer lending. However those who are happier having someone perhaps more equipped to handle their money, may not be suited to this style of investment.
Peer to peer lending removes the middleman of a broker or bank manager, and gives individual lenders the opportunity to choose borrowers who they feel are a worthy cause. Individuals may look for borrowers who they feel empathy with, such as military members, those who share the same church, or teachers. Some prefer to lend to others in the same state, or to help those starting their own businesses.
Some will choose to put their money towards those struggling to pay off student loans. It need not be such an individual choice but the option is there. It is thus possible to invest in an individual based on altruistic empathy rather than just loan to anyone.
Diversification and minimizing risk is controllable with peer to peer lending, but the lender should appreciate their cash will be tied up for most usually three years to receive the optimum yield. The expected yields are worth the investment and if you suffer a delinquency on one loan the odds are still in your favor of returning a good profit if you diversify your initial lending.
If the concept of peer to peer lending is clear to you and makes financial sense then it is probably the right vehicle for you to invest in. Naturally don’t put all your eggs in one basket but consider the investment as part of your overall portfolio.