Pros and Cons of Investing in P2P Lending

Are you nearing retirement and wondering whether you have saved enough for your golden years? At least you’re in good company; there are millions of Americans in the same position. However, you do have some options to help you grow your savings without risking everything. One of them is investing in peer-to-peer lending, or P2P lending as it’s known in investment circles. Here are some pros and cons to weigh when you’re considering it as an investment option.

Who Are the Borrowers?

P2P lending is exactly what it sounds like. People and businesses apply for a loan online at a P2P site such as Prosper or Lending Club, for a loan that can range from $2,000 to $35,000. Applicants are screened for their credit rating and other financial information before their loan request is posted, along with information about why the loan is needed.

The Pros

Individual investors decide the merits of each loan and choose whether they want to help fund it and how much they will invest. Some benefits for investors include:

It’s easy to set up an account at the P2P site of your choice.
You don’t have to pay high brokerage fees.
Lenders are not limited to a certain number of investments. Your portfolio can include thousands of loans if you wish.
You will receive monthly payments toward the principal and interest, giving you a steady source of income. It’s your choice whether to reinvest the payments you receive or withdraw the money.
You decide what level of risk to accept in loans that are categorized by risk and interest-rate amounts. As in traditional investments, higher-risk loans have higher interest rates, which gives you a larger return. Start your accounting career with help from MVU Online.

The Cons

There are always risks in investing, so make sure you’re comfortable with them before you commit. Here are a few things to consider:

You could lose your money. There is always the potential that a borrower doesn’t or can’t repay the loan. They may declare bankruptcy or simply default.
There are fees attached to this type of investment, usually a 1 percent service fee, which is still a lot less than brokerage fees.
It does take a little time to review and decide which loans you will fund. Experts advise spreading your investment through as many as 100. Should one or two default, you may be able to recoup your loss on another loan. Learn more about investing and accounting.
Invest for the long run. When you fund a loan, you have committed to it for however long the loan term is (loan repayment times are capped at five years). You can’t sell the loan.
Think of P2P lending as a long-term investment; don’t get into it if you expect to make a killing in a few short months.

There are several business models for P2P lending sites, including equity-based, reward-based, and donation-based, invoice trading and more. Do your research and find one you’re comfortable with. With a small investment of $25, it can’t hurt much to try one or two out before deciding.

Home Improvements on a Budget

Improving your home doesn’t have to be costly if you know the right way to go about it – there are plenty of ways to revamp a property without splashing too much cash. What’s more, the results can add value to your home (often one of the biggest investments you have) that’s well in excess of the amount you spent. Before undertaking any major project, however, contact www.castlecover.co.uk or whoever provides your home insurance: they will need to know if you’re adding an extension or conservatory, and your policy may be invalidated if you don’t.

Insulation is one of the best ways to improve your house on a budget. Lining the loft with mineral wool sheeting usually costs between £50 and £300, but you’ll soon notice the savings on your energy bills and good insulation can be a major selling point when you put the property on the market. Compare the prices offered by major DIY stores or see if local providers will cut you a deal – many will be happy to drop their prices a little if it guarantees your custom.

Another low-cost way to spruce up your house is to repaint walls and cabinets. White paint is cheap, easily available and goes with everything, so just sand down the surfaces and give them a once-over with the brush. Alternatively, give a room a distinctive look by painting a single feature wall, choosing a colour that contrasts with the others.

For bigger projects, such as extensions, you will naturally have to pay more – but the added value can make it worthwhile, particularly if it significantly increases the property’s floor space. Planning is the key to a successful extension: spend plenty of time working out costings, looking around for the cheapest quotes from handymen, and rent rather than buy tools if you’ll only need them for a day or two.

Builder’s merchants will often have excess stock that can be picked up at a discount, so try to source your materials from these. If your neighbours are having similar work done, see if they want to share the cost of tools, materials and labour: this is an oft-overlooked tactic that can really drive down the cost of a larger project.

Options Pricing

An option is a financial contract that gives the holder the right but not the obligation to buy and sell it at a predetermined price. In other words the holder of contract can sell it or keep it at his will, when the expiry date commences, as he is not obligated to do so.

 

A basic option contract consists of a strike price or the price at which the option is going to be traded, at a certain date and premium, or the price at which the buyer purchases the option. If for example a person wants to buy an option for 200 shares in ABC enterprises, he will have to pay a price or premium to purchase that contract say $10. Then if the share is trading at $10 per and the strike price is $12 per share he will have two options-

 

a) CALL OPTION

B) PUT OPTION

 

In a call option the person will buy the share during the expiry date. In the above example the person will assume that the price of the share will rise up more than $12 to say $14.If that happens, during the expiry date the person can purchase $14 dollar worth of shares for $12 thus making a profit(commission, fees and taxes not included ) of $390 or 14*200-[12*200+10].

 

In a put option the person will sell the shares during the expiry date. Again,

in the above illustration, the person will assume that the stock price will decrease below $12 to say $9 so when the contract expires he will sell $9 worth of shares for $12 and so, not including commission and taxes, his profit will be 12*200-[9*200+10] or $590.

 

Call options and put options are a great way to leverage shares and minimize the loss as the person will only lose the price that he paid for acquiring the options contract, which is only a tiny portion of the actual price money one would pay to buy that many number of shares. This is just a basic level intro as option trading is way more complicated and complex compared to this.

 

Options , whether call or put, can themselves be classified into 2 categories based on the underlying  stock ownership, Naked and covered. Naked options is writing or selling the option on stocks that is not owned by the seller and due to this reason they are highly volatile and very risky.

In a fictional scenario I want to sell a call option for 100 shares to my friend, on shares of a blue chip company that I do not own. If the shares are currently trading at $10, I sell the option for a premium of $150, at a $12 strike price, assuming that the stock price will not rise, more than $12. In this case 2 things can happen, my assumptions will be correct and I have made $150 dollars as a premium or the company is taken over by a powerful corporation and the share price has risen to $30 or in short I am at a loss.

 

This is because I will now have to buy 100 shares at $30 and sell them to my friend for $12 thus incurring a loss of $1200-$3000 or $1800.

But if, in this same scenario, I had actually owned the stock when selling the option then I would sell it for $12 without spending $3000 to buy the shares as I already own them.

 

So in a nutshell, this means that naked option trading must be only done by the most experienced traders who can afford to lose a lot of money and covered call trading must be done by the newest and least experienced people to prevent lot of losses.

 

Note- The above scenes take place without including fees, commission and taxes.

YFS is owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances. Join YFS’s mailing list for straight forward financial advice by clicking here.

The New Investorz Blog

As you probably already know I (Andy Hough a.k.a. Tight Fisted Miser) bought Investorz Blog from Tony this week. My initial plan for this blog is to leave it pretty much the same. There are still a few posts by Tony scheduled to go live in the next week or so and he is supposed to write some more posts next year. You shouldn’t notice any major changes during this time. I might add some different types of advertising but I don’t plan to do any posting myself during this time. I’m keeping the theme for now as I explore how it works. After I have a good feel for it I’ll decide whether I want to switch to a different theme.

My initial plan was to keep Tony on as a staff writer after purchasing the blog. Given his actions after selling the blog that have created conflict in the Yakezie community and could reduce the reputation and profitability of Investorz Blog that plan is being reevaluated but no final decision has been made. I hope everyone will stick with the blog through this transition and if you have any suggestions on how to improve the blog I’d love to hear them.

What I Agree and Disagree with The Four Hour Workweek

I’ve been reading the 4 Hour Workweek by Tim Ferris over the past few days (again). And I’d have to say that he has some pretty awesome/useful information in there. But of course, I don’t agree with everything. Here’s what I agree with and don’t, and how it relates to investing.

Agree

Doing something unimportant well doesn’t make it important.

Completely true. Some people feel like they have to listen to the latest BS spit out my Jim Cramer. Don’t, because anyone can be a good listener, and it’s not important.

Requiring a lot of time does not make a task important.

There are many menial jobs  that can be outsourced. You only have 24 hours in a day, so don’t waste time doing something unimportant.

80% of all consequences come from 20% of the causes.

So true. That’s why you should not commit yourself to every opportunity that presents itself. Some people have the notion that they need to pursue every money making opportunity. Don’t. 80% of all stock market gains are realized by 20% of the investors and 20% of an individual portfolio.

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Is a University Degree Worth It?

Are universities worth it? Is a degree worth the time? Is the graduation scroll worth the money?

That’s a problem that many parents are considering nowadays. The cost of a post-secondary education has steadily increased over the past ten years. In other words, more and more undergraduate students need student loans in order to go to university. Many people who can’t afford to go to university and don’t want thousands of dollars worth of debt simply decide to start working after high school.

In this recession, more and more university graduates realize that they can’t find a job in the field they majored in. Young adults who majored in finance can’t find finance jobs, engineers can’t find engineering jobs, etc. Hence, it is not uncommon nowadays to see waiters who graduated with a degree in humanities from Yale. That’s the state of the jobs situation in America.

So if students are spending years and thousands of dollars on a university education, and end up getting the same job as those who didn’t go to university are, is a university degree worth it?

Let’s consider from two points of view; those who plan on working for others after university (or after getting an MBA), and those who plan on becoming entrepreneurs.

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American Democracy – Left for Dead

When the United States of America was founded on July 4, 1776, all the European nations predicted that the American democractic political system would be a failed experiment. And for 85 years, those naysayers were proved wrong. Then came the outbreak of the Civil War, and once again, the critics came out saying the democracy doesn’t work, just look at the war they’re having in the U.S. But when the war ended, the critics were proved wrong.

Democracy is was supposed to be about the will of the PEOPLE, not some Fortune 500 CEO. Like they say “when it leaks, it pours.” This “Great Recession” has exposed the real dark side of democracy: money talks.

50 years ago, people would have been outraged if their government had $15 trillion in debt. 40 years ago, Americans would have protested en masse if their government was involved in a massive foreign war. 50 years ago, Americans would have fought for what they believed was right. But times are a-changing……

So what’s changed?? Capitalism and democracy was initially a wonderful idea. The focus of the country was to be on business. Successful economy = happy people = happy lives = happy voters. It didn’t matter if you were Muslim, or Christian, or beileved in a conservative government, or a liberal government. All that mattered was – is the economy humming along nicely. If politicians instigated the right policies, businesses and the economy would flourish.  If businesses were successful, the profits would trickle down to the masses. Prosperity everywhere.

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My Backup Plan

The first half of this story is totally unrelated to investing, but I promise you, I will relate the second half of this post to investing.

I was reading Pat Flynn’s recent October blog report, and he mentioned a WordPress plugin called “Limit Login Attempts”. This tool shows you the number of jerks and hackers that attempt to login to your site. It also shows you the IP address of the hackers, and allows you to lock them out. So here’s the image of the number of hackers who tried to log in to Pat’s blog.

Pretty scary, isn’t it?

Continue reading My Backup Plan

The Millionaire Fastlane Giveaway!

Hey there everyone! I recently shot MJ DeMarco an email asking about some personal stuff, and not only did he reply, but also agreed to give away 3 copies of his bestselling book for free, to my readers! In case you don’t know who he is, or what his book is about, click here, or look below at the screenshot.

Continue reading The Millionaire Fastlane Giveaway!