“SCREW THE BANKS” — Peer To Peer (P2P) Lending

As we carry on our journey to riches we have looked at how to set up your accounts to put your money on autopilot, understanding the power of compound interest, then we had a look at Index funds and the fundamental places to invest (Shares & Bonds).

As we carry on this path of riches I will continue to discover and post about places making money and today I will dive into Peer 2 Peer (P2P) Lending. Yeah, power to the people!

P2P hasn’t been around for a long time compared to Stocks or Bonds, it came about in the early 2000s but really started making some traction around 2010. Many companies out there offer you to invest (or Borrow) on their platform where you can choose the rate. Wait! Chose my rate? Why wouldn’t I just pick the highest return rate possible then you might be asking. Well, there is always risk involved when leading money.

P2P lending can be as safe as you make it. For those new to P2P lending, experts suggest starting conservatively and also diversifying your investments. In other words, don’t lend all your money to one borrower. Instead, hedge your bets by lending just a bit of money to many borrowers. This is the best way to protect yourself against one devastating blow. You can opt to invest in only a portion of a borrower’s request on P2P lending platforms like Lending Club or Prosper. The straightforward logic behind this is that it’s unlikely that all of these borrowers would fail on their loans.

So how does it work?

In order to enter the platform, borrowers must undergo a credit assessment. Borrowers will receive a suitable credit score and interest rate based on their creditworthiness. The information will then be displayed on the investor marketplace for funding after final loan approvals. Investors will examine borrowers’ information, for example, employment status, credit history, debt to income ratio, loan purpose and terms. Investors will then use this information to make their investment decisions based on their risk appetite.

When the loans are 100% funded, the money will be disbursed to the borrowers. The borrowers will then have to make monthly repayments according to the loan repayment schedule. Making regular repayments on time enables borrowers to maintain a good credit history.

What kind of interest can I get?

From my digging around online for this post I came across a lot of different rates and I went onto all the biggest P2P sites in the United States, United Kingdom, Europe, Australia and New Zealand. They all vary but your low-risk loans sit around 2% to 6%; your more medium risk is around 7% — 9% and then your high-risk loans can start around 10% going up to +30%. Form this little research I can see that it pays out better than your high-interest savings account. The downside is that you will have to do some groundwork and make decisions on where to invest your money also know as risk analysis (I will share Warren Buffets key points he looks at when investing and applies to our investments here).

The minimum amount to invest isn’t too high on these well know P2P platforms which make them a great way to get started. I have not yet invested into P2P as I have to see if money elsewhere is worth it or not and see where I get the best return at a level of risk I am willing to accept. What is acceptable? where you can place your money and not worry about it and then come back to it to find it have grown into something nice

Till next post — Jason Prasad aka Mr R2R

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