Why Invest in P2P Lending?

6/04/2019 01:00:00 PM

What is P2P Lending?

Peer-to-peer lending, also known as P2P lending, is a system where borrowers and lenders can directly coordinate with one another. When it comes to P2P lending platforms, they act as middlemen that offer different kinds of P2P loan investing opportunities. Moreover, if you are planning to either invest or borrow money through P2P lending platforms, it is crucial that you understand how each type of loan is subjected to different risk profile and return.

Over the years, the number of companies that have taken on the role of an intermediary between borrowers and lenders has drastically increased over the years. Nevertheless, there are two types of P2P lending websites.

The first one is P2P lending marketplaces wherein several loan originators are grouped under one platform or website. The second type if P2P loan originators who directly engage with both lenders and borrowers.

What is the Difference Between P2P Lenders and Traditional Banks?

There is a reason why the P2P lending system still exists to this day. While it is true that an economy cannot function without banking services, this doesn’t mean that it cannot survive without banks.

With that in mind, P2P lending provides both borrowers and lenders an opportunity to raise and acquire funds through technology. In addition, the P2P lending system is known for providing higher interest rates at the price of risk.

Today, P2P lending is now tapping into various niche markets which were previously restricted to banks. You see, P2P lenders can still operate from small premises as compared to banks that are tied up to a lot of capital. P2P lending is a form of investment while bank deposits are a way to save money.

In addition, there are also certain risks applied when it comes to P2P lending. For one, bank deposits are guaranteed by the Government, whereas, P2P lending is not. Bank deposits are also subjected to a number of local laws, which is a way to reduce withdrawal rates at times of economic crisis. For P2P lending, this factor doesn’t exist.

Nevertheless, more and more people are engaging in various P2P lending transactions for a number of reasons. Here’s why you should too!

Top Reasons to Invest in P2P Lending
  • Fast and easy
One of the popular reasons as to why people are investing in P2P lending systems is because the process is very fast and easy. Since everything is done online, you no longer have to spend so much time, effort, and money to go to the bank.

P2P lenders will only require you to fill out an online application form, which takes about a few minutes to accomplish. This level of convenience provided by P2P lending platforms lets you avail of a loan wherever and whenever as long as you have your device and internet connection.
  • Monthly cash flow
With P2P lending systems, investors are given regular cash inflow into their account on a monthly basis. This is a feature that is not present in traditional methods of lending money.
  • A variety of options in lending
There are a number of P2P lending companies that offer both the borrower and the lender various loan options. As a lender and an investor, you can choose to lend your money to an individual, a well-established business, or an organization.
  • Better rates of return for your money
Do note that 0.25% is the average rate for a typical bank savings account, and this is per annum. Let’s try and do the math:

If you invested a total of Php 100,000 through a bank savings account, then your return on investment (ROI) is only Php 250. On another note, if you invest the same amount through a P2P lending platform with an average return rate of 10% up to 15%, you will get an ROI of Php 10,000 in a year.

Remember, when it comes to investing, the higher the risk, the higher the chance you will get a better ROI; this chance is provided to you by the P2P lending system.
  • The option to diversify your investments
Another common tip when it comes to investing is to always diversify. Never put all of your eggs in one basket. The P2P lending system provides you with this opportunity. You can easily diversify your investments to reduce the risk.

A P2P lending platform allows you to lend money across different loan types. With a diversified portfolio, you can make use of the law of averages. If you invested in three loans, one of which resulted in a negative ROI, the other two winning picks can easily even out that one loss.
  • Passive income stream
If you invest your money through a bank or a credit union, that money is essentially tied, especially if you are just starting out. This is the type of investment wherein you have to sit and wait for it to accumulate over a period of time to ensure significant returns.

On the other hand, P2P lending platforms provide you with the opportunity to earn potential passive income streams through a monthly payout.
  • Low barrier entry investment option
The entry point for most banks is too high for someone who is just beginning to learn the ropes of investing. For P2P lending platforms, you can start investing for as little as Php 5,000. With this amount, you can fund loans from borrowers and start earning your ROIs by the next month.

The low barrier entry investment option that is provided to you by P2P lending platforms sounds enticing for beginner investors. If you are in this position or if you want to test out the waters of high stakes investing, much like that of stock trading, you can try P2P lending platforms to get the feel of things.

  • Faster in reaching significant gains 

As explained earlier, if you invest in banks or credit unions, you will need to sit and wait for your ROI to accumulate. On top of that, the yearly ROI ratio is quite low as compared to what you can earn through P2P lending platforms.

Furthermore, P2P lending allows you to build up your assets and earnings at a faster turnaround time as compared to when you invest in mutual funds or a regular banks savings account.

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