Previously we’ve discussed the nature of the peer-to-peer lending scene and how to best approach the service to receive a personal loan. Now we want to look at the flip side. What if you want to be a lender instead of a borrower? The service is peer-to-peer after all, meaning you have the option to be either.
But how much money can you really make? Is it a better investment than say, the stock market? And how risky is this new venture?
Kinds of P2P Lending
There are many different ways to approach the P2P scene as a lender. First, most platforms allow you to choose whom you offer loans to. Platforms like Lending Club offer metrics known as loan grades. Here you have the choice to pick from borrowers who are ranked based on their credit history and likeliness of paying back the loan, from A1 (least risky) all the way to D5 (most risky). Just like with traditional lenders, the more risk involved with the loan, the higher the rate of return is.
You as a lending investor must pick and choose your borrowers wisely. If you choose too many A0rated borrowers, your returns may not be very large. If you choose too many risky borrowers, the number of defaulted loans will increase and some of your loans will not be paid back. If you look at investing fundamentals and statistics, with a particular focus on P2P lending, you’ll see that a diversified portfolio is always best. I won’t go into the complex mathematics behind this investment strategy, but the benefits of it should be obvious. You need to pair risk with returns and ensure that your money is both growing at a healthy rate and kept safe from default.
P2P Investor Alternative: Microloans
If standard P2P lending seems a bit too scary for you, but you’re interested in getting involved at least partially, there are other options. Microloans to people in impoverished nations is one way to get a feel for P2P lending while also helping those in need. Many microloan platforms allow you to lend as little as $25 at a time. The returns you’ll see on your loans are unlikely to make you a millionaire. But just like with mainstream P2P lending, you usually have the option to pick and choose how risky of a loan you want to offer.
Final Thoughts on Making Money as a Peer-to-Peer Lender
P2P lending can be a great way to invest your money. But just like any form of investment, you need to understand the nature of investment and do research before committing any of your money. Investing takes time and patience. This article isn’t investing advice, but rather an introduction to becoming a P2P lender. It is just as safe as investing in the stock market. But just like investing in the stock market, you must know what you’re doing and not treat the industry like a casino.
