Investors who are looking for a new option to add to their current portfolios may want to consider taking a look at a market in the lending industry that is unique and gaining ground in popularity. Peer to Peer lending. How it works is that it cuts banks and major financial institutions out of the equation. Stakeholders who buy shares in the Peer to Peer lending company are actually taking on the risks for the loan but they also reap the benefits which could be substantial. Individual lenders are connected with borrowers to provide loan funds in small increments. It’s a faster way for borrowers to access funds and investors have a means of earn more on their investment. Here are 10 reasons why you may want to consider this as an option.
1. It’s a good way to start investing with a low minimum
You can get in on the action and become an investor for as little as $500. If you are interested in becoming an investor and you have a small amount to invest, this is something that doesn’t take a lot for the initial investment. You can continue to purchase an interest in a Peer to Peer lending company as often as you would like, but it’s not something that requires you to start with a large investment. It’s a good way to make an investment and then see how well it does before you decide whether or not to continue with more serious amounts or reinvestment of dividends into the company.
2. You’re helping to support small businesses
Although some of the loans are provided for qualified individuals, the majority are made to businesses. By investing in a Peer to Peer lender you are helping to finance small businesses that have the potential to affect the local economy in a positive way. It’s the equivalent of Americans investing in one another and helping to build businesses that are either just starting up or in need of funds for expansion and growth.
3. There is a potential for a greater return on investment
On average the investments made in Peer to Peer lending companies can result in an ROI between 5 to 12% of the initial investment. When you compare this to some of the other investment options, it’s fairly attractive. It’s always a good idea to read the fine print to learn about the company that you plan to invest in before you make the commitment, such as the interest rates charged, default rates and the rating that customers give them for services and fairness. Reputation is important so keep this in mind before joining their team with your investment dollars.
4. You’re helping to create local jobs
Businesses that are growing and expanding have a need to hire more help to keep up with the demands for their operations. When they take out business loans for these purposes, it’s helping everyone to prosper. New jobs are created and those who were previously without work become gainfully employed. this is just one of the ways that the investment you make in Peer to Peer lending can make a difference in the local community.
5. The middle man is cut out of the equation
With no major financial institutions or banks taking a cut of the proceeds, there is a potential to make a lot more on your investment. Peer to Peer is people helping people. Some more traditional lenders associated with banks tend to charge a lot more in interest for the loans that they provide. This can result in a higher default rate because of the cost of the money that is advanced. Some lenders charge from 6.95% to an astronomical 35.89% which can make it difficult or impossible for borrowers to pay back if they experience a financial setback in business or their personal lives. When there is a bank or financial institution involved, the percentage that they charge for handling is usually as low as one percent.
6. The rates are lower than banks but higher than traditional money market accounts
When you compare the potential of the return on investment for peer to peer lending with that of what your money would earn sitting in a money market account or a certificate of deposit, it’s really a no-brainer. The returns are a lot higher and they come in incrementally in monthly payments. It’s a matter of putting funds that you are not currently using to work for you.
7. You’re not taking the risk alone
Generally, investments in peer to peer lending mean that the money you invest will be spread over several different notes. These are smaller portions of a variety of loans that are approved and it can be as little as $25 on a single loan. You can choose to spread the investment over as many loans as you would like.
8. You choose the P2P lender that you invest in
There are several Peer to Peer lending firms out there. This gives you a variety of options. It’s always a good idea to become familiar with the company, their investment platforms, and requirements for investors, and their track record with customers. It’s your money and you’re in charge. If you don’t agree with the policies of one company you can find another.
9. You can set the maximum loan size
Once you set up an investment portfolio with a company you will have the option of establishing the minimum loan size that you will invest in and the maximum. For example, if you invest $5,500 you can invest in loans of $500 for 11 borrowers. This is just an example but you will have the ability to set up the parameters and decide how you want the money spread out. In many cases, more is better to lessen the risk of loss through default.
10. You can set the parameters of who you want to lend to
While not all lending companies offer this option for investors, it’s a good idea to go with one that does. Some will allow investors to determine the criteria for borrowers based on credit rating, or other criteria that help to identify the potential or risk of default. There are several different criteria to consider and rankings that range from A to G. You determine the amount of risk that you are willing to take within a specific profile of borrowers.