Peer-to-Peer Lending Investing: Everything You Need To Know About Making Money with P2P

Peer-to-peer lending investing allows people to issue loans to other people, skipping the bank. 

Investors looking to diversify their holdings while helping regular people organize their financial lives should consider P2P platforms. 

Here’s everything you need to know about investing via peer-to-peer lending. 

Peer-to-Peer Lending Investing

When you invest in peer-to-peer lending, you’re investing in real people. The platforms connect borrowers who need help with investors who are willing to lend a hand. 

Though it sounds romantic, there’s much to consider before diving in. Investors may want to help folks, but they’re not entirely altruistic. 

The investment must be worthwhile. 

Is Peer-to-Peer Lending a Good Investment?

The crucial question about peer-to-peer lending is whether it’s a good investment. Unfortunately, there are far too many variables to provide a good response. 

The better question is whether it’s a good investment for you.

Everyone has different investment goals, knowledge, risk tolerance, and ideals. Combining these values defines whether any investment is a “good investment,” and it’s different for everyone. 

When is Peer-to-Peer Investing a Bad Idea?

Peer-to-peer investing isn’t ideal for beginners, those with low-risk tolerances, or those without much capital. 

Beginners should start with retirement accounts and index funds, ensuring their own financial security before they attempt to help others. In addition, they may not understand the complex interplay between loan rating, credit score, and the likelihood that the borrower will default. 

If you’re just starting on your investment journey, check out our Beginner’s Guide to Investing for tips on how to start. 

Peer-to-peer lending is more risky than other investment vehicles, as you fund individual people rather than companies. Life happens, and people default. If you can’t handle that, you shouldn’t even attempt to fund their loans. 

Finally, peer-to-peer lending is a bad idea for those with little money to invest. You should focus on building capital before exploring riskier investment options like P2P. 

When is it a Good Investment?

The warnings about P2P lending make it seem like a bad idea overall. 

It’s not. It’s not a bad investment, and it’s not a scam. 

Peer-to-peer lending investing is ideal for experienced investors looking to diversify. It’s also perfect for people who want to help others and have extra money to invest after fully funding their retirement and brokerage accounts.

Can You Make Money with Peer-to-Peer Lending?

Peer-to-peer lending is a legitimate investment vehicle. The entire point is to make money. It would be a peer-to-peer charity if investors didn’t get anything from it. 

The amount you can make (or lose) varies depending on your initial investment and risk profile. 

Like with any investment, the more money you put in, the more you stand to make. However, the inverse is also true, that the more you put in, the greater the risk. 

What is the Risk?

Every investment carries risk. 

With P2P lending, there’s always a risk that the borrower will default. Some people who borrow on peer-to-peer lending platforms do so because they don’t have many other borrowing options or they have maxed out their credit cards. They may be at higher risk for defaulting than borrowers seeking loans through traditional lending sources. 

The interest rates reflect the level of risk, so you have higher returns – if the borrow doesn’t default.

Inflation poses another risk. Interest rates on P2P loans are static. If you’ve funded loans at low interest rates, your earnings won’t beat inflation, even if nobody defaults. 

The final risk is that, traditionally, returns on peer-to-peer loans are lower than stock market returns. Of course, past performance is no guarantee of future results, so it’s possible that it could change at any time. Nobody knows which sectors will be hit the worst by the next recession, so diversification is always a good idea.

What is the Best Peer-to-Peer Lending Site for Investors?

Now that Lending Club has moved into traditional banking, there’s only one good site for peer-to-peer lending: Prosper. 

Founded in 2005, Prosper has decades of experience in Peer-to-Peer lending. The platform boasts an average three-year rolling return rate of 6.1% and a 5.5% average historical rate. 

Similar Platforms

Many websites thrust every alternative loan option under the Peer-to-Peer umbrella, but most platforms promoted on these websites aren’t actually peer-to-peer. They don’t offer any investment options for ordinary people. 

The platforms most commonly confused with a P2P platform are Upstart, Peerstreet, Funding Circle, and Kiva. 

None of these platforms allow individual users to invest in loans. 

Upstart is a wonderful platform that looks at borrowers holistically when deciding to fund a loan, Peerstreet is a real estate investment platform, and Funding Circle offers loans to small businesses. 

Kiva is the most similar to a peer-to-peer lending platform. It connects lenders to disadvantaged people worldwide to help fund their projects aimed at enhancing society. When you invest in Kiva, you invest in people worldwide who need a helping hand.  

These platforms are great and have advantages, but they aren’t technically peer-to-peer lending.

How Do I Invest with Peer-to-Peer Lending?

Investing with peer-to-peer lending is easy, depending on your state. Some states don’t allow their residents to invest with peer-to-peer lending, so you must do your due diligence to ensure that your state allows you to invest in your chosen platform. 

Investing with Prosper

If you want to set up a peer-to-peer investment account with Prosper, click here to go to the homepage and choose  “get started” under “invest” on the floating menu.

Prosper will ask for your zip code to ensure you can use the platform in your state. If you can, it will guide you through your investment options. 

You must add your tax information and a bank account to fund your loans. 

Once you give them all the information they need, you can start browsing notes and decide which ones you want to invest in. 

Disadvantages of Investing with Peer-to-Peer Lending

Peer to Peer Lending has its disadvantages. 

Interest rates are slightly lower than you would get in a traditional ETF, and when borrowers default, that money is gone. It’s not like if a company’s stock is down, it can go up again. It’s more like when a company goes out of business, and you lose the entire investment. 

That’s why it’s great to use the micro-investing tool and only put a small amount of money into each loan. This way, if one or two of the loans default, you will still make positive returns on the ones that didn’t.

Another common complaint about peer-to-peer lending is that institutional investors gobble up loans. This is great for borrowers because they have more opportunities to fund their loans. It’s not so great for investors because the big guys choose the best loans with the lowest risk. That leaves small individual investors with fewer options. 

However, if one of your reasons for investing in peer-to-peer lending is to help out some people who need it, this isn’t much of a detriment.

Is Peer-to-Peer Lending a Good Investment Option for You?

Peer-to-peer lending is an ideal investment for someone who wants to diversify, help others, and earn a little passive income. 

If that’s you, sign up today. If the risk outweighs the reward, stick with traditional index fund investing.