Peer-to-peer lending, also known as P2P, involves lending money to individuals directly. An online website dedicated to P2P lending is used. Are you aware of the advantages of lending to your peers?
Higher interest rates. Are you looking for higher rates than what money market and CD accounts are paying? P2P loans offer better rates than bank accounts. This is because there is no FDIC backing to the loans so the risk of default is higher. P2P loans offer attractive yields in our rate starved economic environment. Individuals looking for higher income will find P2P loans fill this gap.
Quick, easy online investing. P2P loans are conducted through a website intermediary. This makes it convenient to invest in these loans. All research on the borrower is done by the company owning the website. Monthly loan repayments are sent directly to your account.
Alternative investment. Diversification is important when investing. P2P loans are considered as alternative investments. These kinds of investments are believed to bring further diversity to a portfolio. One reason is that they are considered to be uncorrelated to the stock and bond markets. This means they will react differently than stocks or bonds in various economic scenarios. The idea being that when stocks and bonds are down alternatives will produce positive returns.
Income stream. Loans are normally set for three to five years. They can provide an income stream for the length of the loan. Each month interest and part of the original investment is returned to the investor. This stream of income can be reinvested or used to plan and pay for expenses. Each month the same amount will be transferred to your account until the loan is finished.
You get to choose. P2P lending allows you to choose which loans you want to support and which you want to avoid. Want to fund someone's home improvement loan? No problem. Don't trust debt consolidation loans? You are free to skip them. There are a good selection of loans from which to choose. Plus, you can partially fund loans thereby investing in several different loan types.
Can trade loans (notes). The websites offer a way for you to sell your loans (notes) to other investors. The two big P2P lenders, Prosper and Lending Club, have connected with Folio Investing to allow you to trade your notes on the Folio Marketplace. You have to open a brokerage account with Folio and then you can trade your notes.
SEC regulation. P2P lenders are regulated by the SEC. There is a prospectus on the websites that you can read prior to investing. This provides a level of reassurance to investors that there is oversight of the P2P lenders.
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Investing $10K in 2014 (Sandra's Investing Basics)