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.
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.
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.