When most people think of investing they likely think of the stock market. Instantly they have images in their minds of Wall Street traders yelling “buy” and “sell” while day traders either get rich or lose it all. While stocks and bonds remain an important and large part of investing, new opportunities for income investors have arisen in recent years thanks to the growing FinTech sector. One increasingly popular option for long-term investors is peer to peer (P2P) lending, sometimes known as marketplace lending.
As a recent MarketWatch article highlights, P2P platforms such as Lending Club allow investors to receive healthy returns while managing their level of risk. Of course, as the author points out, these platforms may require a little more research and can be more “hands on” than some investors may be used to. To make getting started a little easier, they’ve included a helpful infographic to explain the basic premise of P2P lending:
Like with any investment, participating on P2P platforms does come with some risk. However one of the great things about these marketplace lending platforms is that there are numerous ways to customize your investment to the level of risk you’re comfortable with.
For example Lending Club grades all of their loans a scale of ‘A’ to ‘G’ based on credit worthiness. While ‘A’ loans are less likely to default, they also have a lower interest rate. As you’d expect ‘G’ loans have a greater chance of falling through but, if they don’t, the rate of return can be much higher.
Another way for investors to manage risk on marketplace lending platforms is to diversify. Lending Club allows investors to chip in as little as $25 towards any given loan. Thus instead of fulfilling one $2,500 loan (which could default, losing all of your money), you can invest $25 in 100 loans at varying rates to better your odds. In fact Lending Club reports that of investors with at least 100 notes of comparable size on the platform, 99.9% see positive returns.
Overall peer to peer lending platform can be a great opportunity for long-term investors to bring in some extra income. Although finding the right notes to purchase might take some extra time and research, the ability to diversify and manage your level of risk makes it ripe for both conservative and aggressive investors. With marketplace lending growing every quarter there promises to be plenty of room for new investors to get started and join the FinTech revolution.