How much can you make peer to peer lending?
Peer to Peer (P2P) lending has grown to become a quite reliable method of financing.
Based on this reality, we’d discuss peer to peer lending returns.
Hence, the focus of our discussion is to highlight its importance. Returns from such lending will be under focus. This will serve to educate the borrower as well as the investor on what to expect.
Using this lending model, most lenders have found a creative way to earn decent returns on investments.
What is Peer to Peer Lending – Is it Safe?
To take the reader along, we need to fully explain what this concept stands for. Peer to peer lending is essentially a type of lending where individuals obtain direct loans from other individuals. This takes out the role played by financial institutions as middle men.
This concept is also known by several names. These include crowdfunding, crowd lending as well as social lending. These names depict the nature of this type of lending.
The concept of peer to peer lending started as early as 2005. Since then, it has received warm reception. In addition to that, lot’s of successful businesses today obtained their first investments from this lending model.
How it Works
This type of lending is made easy by a regulator. In this case, mostly a website. These are known as P2P lending websites. Here, they set the lending terms.
Such include the transaction fees as well as interest rates.
To lend money, you need to first open an account with your preferred P2P lending website. After opening an account successfully, you deposit the money to be invested.
The same applies to the loan applicant. As a loan applicant, you also need to create a profile or account. This is in addition to your financial profile. This financial profile is used to categorize you according to risk exposure. There are also other finer details that are supplied.
Such details are required for smooth transaction. So, having explained this, let’s get back to our discussion.
Peer to Peer Lending – Best Returns
It’s a well known fact that people (in this case lenders) prefer this method than keeping their monies in savings accounts.
Under such circumstances, their deposits only attract little income. P2P lending on the other hand is a more viable option. Since this offers a better alternative, what are the typical returns like? This is the crux of our discussion.
We’ll soon find out if there’s a uniform lending return across board.
Is there a Fixed Lending Return?
Whenever discussions are being held about this lending model, there’s hardly a consensus.
In other words, there are variations in answers, and these range from 5 to 15%. This can be even more confusing when probed further.
However, the fact remains that it is a better investment option than keeping your money in savings or certificates of deposits (CDs).
Why it’s Difficult to Have a Fixed Lending Return
There are factors that contribute to the difficulty in coming up with a fixed lending return. When comparing most P2P lending websites, there’s hardly a consensus on lending returns. This is due to a major flaw.
And such flaw is attributed to funds which are uninvested. This alters the peer to peer lending returns calculations significantly. It also differs in the sense that these P2P lending websites have different interest rates.
Having seen the difficulty encountered in arriving at a fixed peer to peer lending return rate, it becomes necessary to find a realistic return rate. So, how do we go about this? You’d find out soon enough.
So, As a Lender, What Should you Expect?
Having compared previous responses on P2P lending return rates, its necessary to have a realistic expectation. Over the years, P2P lending has come of age. Although higher return rates were the norm, this has started to go down.
Hence, for most investors, an 8 to 11% rate is possible.
Rates of return on lending is likely to be affected by an economic downturn. Therefore if you currently have a lending rate of say 12%, you should expect a drop if there’s a negative economic outlook.
Still, there are lenders (investors) who attract return rates of 15%.
Diversifying your peer to peer lending portfolio is a great way to maintain higher lending return rates. This is because over time, such rates are likely to decline. It’s important to note that even a 5% return rate on lending is quite attractive.
So, anything within the 5 to 8% or more should be appreciated. These, in essence are scenarios you should expect as a P2P investor.
If you’re new to P2P lending, you’ll need to compare as many P2P lending websites as possible. This is done with the purpose of finding one which is most suitable. But why is this important? It is because you transaction fees can affect your overall lending returns.
However, as an existing P2P lender, you can find a better deal by following the same process.
The Future of P2P Lending
Though this system of lending started as early as 2005, it has grown to become a trusted investment vehicle. This has resulted in lots of successful startups that have grown into major businesses. The next decade offers tremendous possibilities. And you can tap into this opportunity.
As we’ve seen, peer to peer lending returns are varied. For most people, this is a stable way to grow your investments.
As we earlier mentioned, its wise to have a diversified peer to peer lending portfolio. This helps you maintain a consistent and appreciable return as time goes on.