Anyone who first hears about peer to peer lending and its amazing high-netting return potential is incredulous about all of its claims…I was…you were….everyone was! It just sounds like a scam.
After the initial skepticism was overcome (through research and a bit of trial and error) You got hooked but still found it hard to explain to others how it all works. How and why peer-to-peer lending platforms are capable of generating annual return rates between 8% and 10%….those numbers just sound too crazy to be true….
By now you know they aren’t fantasy as you managed to make a 8% return on one platform and 10% on some other…. With this post I will explain how exactly p2p lending platforms are capable of generating such high ROI for its lenders…
Peer-to-peer (P2P) investing is a type of investment in which individuals lend money to borrowers through an online platform, rather than through a bank or traditional financial institution. Borrowers can be individuals or small businesses seeking loans for various purposes, such as consolidating debt, funding a startup, or paying for home improvements.
Investors can browse loan listings on the P2P platform, which typically include information about the borrower's creditworthiness, the loan amount, the loan term, and the interest rate. Once they have identified a loan they are interested in, they can fund all or a portion of the loan.
In most cases, P2P platforms use a mechanism called "automated underwriting" which assesses creditworthiness of the borrowers by using various data sources and algorithms.
The returns on P2P investments can be higher than traditional savings accounts or bonds, but they also come with higher risks, as borrowers may default on their loans. To mitigate this risk, many P2P platforms allow investors to diversify their investments across multiple loans, and often require borrowers to provide some form of collateral.
It's important to note that P2P investing is generally considered to be higher risk than more traditional forms of investing, and P2P platforms are not subject to the same regulations as traditional financial institutions. The lack of regulation means that P2P platforms may offer more high-risk loans, which may mean higher returns for investors but also higher risk of losing some or all of the invested capital.
There are several major players in the peer-to-peer (P2P) lending universe. Some of the most well-known and established P2P lending platforms include:
There are also other P2P lending platforms operating in different countries such as China, India, Europe and many more.
These platforms have different target audiences and borrowers, and use different methods to assess creditworthiness, so it's important to research the platform and the loans you are considering investing in before making a decision.
There are several ways to earn money through peer-to-peer (P2P) lending:
It is important to remember that P2P lending carries risk, and the return of investment is not guaranteed. An investor may lose some or all of their invested capital, so it is important to research the platform and loans carefully, and to diversify investments across multiple loans to mitigate risk.
The performance of peer-to-peer (P2P) lending can vary widely depending on the platform, the types of loans offered, and the creditworthiness of the borrowers.
Historically, returns for P2P lending have been higher than traditional savings accounts or bonds, but they also come with higher risks, as borrowers may default on their loans. However, P2P lending platforms have been able to offer competitive returns because they can underwrite loans more efficiently, and often charge borrowers higher interest rates than traditional financial institutions.
In general, P2P lending platforms have reported historical annual returns of around 5-10% for investors, but it is important to note that these numbers are not guarantees and past performance does not indicate future results.
The rise of the internet and deregulation of traditional banking and lending were the enablers of a new alternative lending landscape that emerged at the turn of the century.
Basically there are different types of loan offerings for different type of needs. And we have to look at the different type of loan offerings to understand the high interest return rates being offered by peer to peer lending platforms.
Payday loans (are small money advances at a very high interest rates to be paid back when the borrower receives his next paycheck. Common interest annual percentage rates (APR) are in the 391-521% range!!!!!!
Most borrowers using payday loans have bad credit and low incomes and therefore may not have access to credit cards and are forced to use the service of a payday loan company. Payday loan providers therefore can charge exorbitant high interest rates which are calculated on a daily or weekly base e.g. $17.50 interest fee per $100 borrowed for seven days. Most loans are for 30 days or less with loan amounts usually between $100 to $1,500.
The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for money. The lender holds onto the check and cashes it on the agreed upon date, usually the borrower’s next payday. These loans are also called cash advance loans or check advance loans.
In the USA alone 12 million people use payday loans with a total borrowed amount of $7 billion.
Micro loans are a mission-driven form of finance aimed at small business owners who want to borrow $50,000 or less. The interest APR is commonly in the 8-22% range.
According to the Small Business Administration, its microloan program provides micro loans in order for businesses used “for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment.”
In banking terms, a microloan is a very small loan ranging from $500 to $100,000. Historically, banks in the United States haven’t particularly liked dealing with microloans because they have not been profitable financial products for them to market. Other financing companies and institutions have filled this void.
Typical loans are for small business owners who want/need quick money and don’t mind paying a hefty fee in exchange for speed. Typical annual percentage rates range from 30-120%.
In its broadest sense, online lending is any kind of loan that’s not directly from a traditional bank and often online lenders are technology companies that use different methods to communicate with clients, base rates and approval on metrics other than your FICO credit score and similar traditional measurements and apply a different (frequently streamlined or automated) approval process compared to traditional lenders.
This enables them to provide loans super quickly when money is needed by a borrower.
p2p lending marketplaces arose in 2005 by combining the alternative finance services as described above with crowdfunding. Basically peer to peer platforms cut out the middleman aka the payday/micro/online loan provider by bringing borrowers and lenders directly together through their platform/marketplace.
By doing this p2p lenders don’t need to have money at hand themselves which greatly reduces their costs. Their core competence is the platform technology and loan approval automation. By charging small fees (typically around 1%) they can create a highly profitable business that is beneficial for them, the borrower and lender.
The borrower can find loans with lower APR’s and the lender can get higher ROI on his investments in this new peer to peer lending model. Win-win-win for all three parties.
The high return rates investors can make on p2p lending platforms are understandable if you look at the loan services they compete with. Payday loans, micro loans, online loans all charge super high annual percentage rates to their borrowers. peer to peer lendng platforms offer these loans too but at much lower percentages due to their low cost structure.
In that light a payday borrower loaning money at say 30% interest on a p2p platform is not strange at all as he would pay a multitude of that through a traditional (payday) loan institution. And an accompanying ROI of 20%+ for lenders/investors is a logical consequence thereof. Just very sound business principles at work here.
Peer-to-peer (P2P) lending can be a way to earn passive income if you are able to invest in a large number of loans and reinvest the payments you receive from borrowers.
Here are some strategies that can help you achieve this:
It's important to note that P2P lending is not guaranteed passive income and you should carefully assess the platform and the loans you are considering investing in before making a decision. Also, different platforms might have different features available, so it's important to research the specific platform you want to invest with and see if the features you want are offered.
Yes, it is possible to lose money in peer-to-peer (P2P) lending. P2P lending is a higher-risk investment compared to traditional investments such as savings accounts or bonds.
There are several ways in which you can lose money through P2P lending:
It's important to keep in mind that P2P lending can be a good option for those looking for higher returns than traditional investments, but it comes with higher risks as well. It is important to research and invest only in reputable platforms, and to diversify your investments to minimize risk and maximize potential returns. Keep in mind that past performance is not a guarantee of future results, and you should invest only the money you can afford to lose.
Starting with a smaller amount when investing in peer-to-peer (P2P) lending can be a good way to test the waters and get a feel for how the platform works before committing a larger amount of money.
Investing a smaller amount can also be a good way to diversify your investments and spread risk across multiple loans. By investing in a small amount in a variety of loans with different terms and interest rates, you can create a steady stream of income and limit your exposure to the risk of default on any one loan.
It's also important to keep in mind that P2P lending is generally considered to be a higher-risk investment compared to traditional investments, such as savings accounts or bonds, so starting with a smaller amount can help minimize the potential loss of your capital.
Additionally, starting with a small amount can help you to test out the platform, understand its user interface, and see how the platform handles your investments before committing more money.
It is important to keep in mind that it is not a guarantee of returns and past performance is not indicative of future performance. It's also important to research the platform and loans thoroughly before investing and to diversify your investments across multiple loans and platforms to minimize risk and maximize potential returns.
Choosing a trustworthy peer-to-peer (P2P) lending platform is crucial in order to protect your investment and maximize your returns. Here are some key factors to consider when evaluating a P2P lending platform:
It's important to research and invest only in reputable platforms and to diversify your investments to minimize risk and maximize potential returns. Keep in mind that past performance is not a guarantee of future results, and you should invest only the money you can afford to lose.
Peer-to-peer (P2P) investing can offer several rewards for investors, including:
It's important to note that P2P lending is a higher-risk investment than traditional investments, such as savings accounts or bonds, and the return of investment is not guaranteed. It's important to research the platform and the loans you are considering investing in before making a decision, and to diversify your investments across multiple loans to mitigate risk.
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