Peer-to-Peer lending is one of my favorite ways to invest money. It's a really innovative type of investment that not only is completely passive but also comes with really high returns on your money. It currently is the largest part of my investment portfolio in terms of net passive income produced every month.
However, I know that it can be scary at the start to invest in Peer-to-Peer lending. I've been there too, and I was especially afraid that I would lose my investment because of the thought of people not paying me back. So is Peer-to-Peer lending safe, and should you actually consider it as an investment? That's exactly what we are going to see inside this article.
What is Peer-to-Peer Lending?
Peer-to-Peer lending consists of lending your own money to borrowers applying for loans, in exchange of interests on the money you are lending to them. Basically, you are playing the role of a bank by lending money to other people that need money, for example for home improvements or to buy a car, but it can also be lending money to companies for expansion projects. However, it's not about lending a large amount of money to a single person or company, but rather small sums to a large number of people or companies.
This is all made possible by Peer-to-Peer lending platforms, which basically list loans from borrowers and allows you to invest in those loans with your money. Those platforms also come with other cool features, like being able to set auto-invest functions in order to completely automate your Peer-to-Peer lending investments or buyback guarantees that protect your money in case a borrower doesn't pay you back.
Potential Risks with Peer-to-Peer Lending
As for all investments, investing in Peer-to-Peer lending comes with some risks. I consider that there are three major risks that can arise from investing in Peer-to-Peer lending, so let's see them one by one.
The first type of risk is linked to the platforms on which you are investing in. Indeed, those platforms could go bankrupt, or simply be complete scams. That's actually the most important part of what you will have to do when investing in Peer-to-Peer lending. Luckily, there are now many sites with reviews of those platforms, made by people that actually invested their own money and that share the results with others. You also have nice reviews aggregate sites like TrustPilot where you can find what people think about a given platform. So overall, it's definitely possible to choose only the best platforms to invest in.
The second argument against Peer-to-Peer lending is that there is no guarantee that the person you are lending money to will actually pay you back. In theory, this is true, but there are ways to avoid that as well. One of the best ways I know is to only invest in loans that come with what is called a buyback guarantee (a lot of platforms now offer this option). This basically means that even if the borrower doesn't pay back (after a given amount of time, usually 60 days), you will get your money back. Therefore, by investing only in loans with this buyback guarantee & on good platforms, you are sure to really limit the risk of losing any money.
Finally, the last risk I can see with Peer-to-Peer lending is that your money is basically stuck in loans as soon as you invest. Whereas this is true, it's also the case for most other types of investments, for example with real estate (you can't just sell your flat/house instantly). However, there is also an easy way to reduce that risk: you can simply invest in short-term loans only. Not only your money will be blocked for a much smaller amount of time, but also you will invest in a higher quality of loans as those tends to be the best loans on the platforms. Also, many platforms now have a secondary market, which allows you to sell your loans to other investors whenever you want. Some platforms, for example Mintos with their Invest & Access plan, even allow you to have completely liquid investments from which you can just withdraw at any time without penalties.
Benefits of Peer-to-Peer Lending
Now that we saw the potential risks with Peer-to-Peer lending (and how to avoid them or really diminish them), let's talk about the benefits of investing in Peer-to-Peer lending.
Well first, Peer-to-Peer lending has great returns. You usually get above 7% of annual yield, and it's not unusual to have platforms where the yields are above 12%. Compare that to other types of investment, for example savings accounts which usually have yields around 1%. So investing in Peer-to-Peer lending means that you will really make your money work hard for you, and it will allow you to quickly generate a decent amount of passive income with your portfolio.
It's also a completely passive investment. I know a lot of people usually invest their first hard-earned money into real estate, just to find out that they will actually have to spend hours managing it. For me, a good investment should be completely passive, with literally no time spent on it except at the start, and then a few minutes every month to monitor it. Peer-to-Peer lending is exactly that: you need to do some work at the start to find good platforms for example, but after that everything can be automated and you'll only sit back and enjoy the returns :)
What I also like about Peer-to-Peer lending is that it's all manageable online. You can open the account, deposit money, invest, and then get your returns back without ever leaving your house or even talking to another human being. Compare that to opening a bank account or visiting properties to invest in real estate. For me, that's how investments should be like nowadays.
Finally, it's also an investment type where it's really easy to diversify. Imagine you want to invest about 10,000 Euros or Dollars in real estate: the usual way to do that is to get a mortgage, and then buy a small flat or house to rent it. And if there is any problem with that rental, it's game over. Because you had no diversification in your investment. With Peer-to-Peer lending, as you can invest from very low sums (usually from 10 Euros), it's really easy to diversify your investments across many loans & platforms, therefore greatly reducing the amount of risk in your portfolio.
Should You Invest?
To sum up, there are indeed risks that come with investing in Peer-to-Peer lending, as for all investments. However, we saw that we a careful selection of the platforms you are investing in, and by investing only in short-term loans with a buyback guarantee, you greatly reduce the risk of losing any money. For me, Peer-to-Peer lending is a great, modern way to invest money, that is completely passive, that you can manage from your computer, and that will give you great returns while keeping your money. I will therefore really recommend having Peer-to-Peer lending as a part of any investment portfolio.