Peer to peer lending is relatively a new approach related to lending and borrowing. Now you can say goodbye to conventional financial institutions such as banks and turn to the alternative finance options through which you can get quick access to funds without any hassle. P2p lending provides investors with an excellent opportunity to make attractive and steady returns. This lending and borrowing process takes place through online platforms that act as an intermediary and match investors with potential borrowers. Investors can fund a loan entirely or a part of the loan. With the increasing benefits for investors and borrowers, p2p loans are becoming popular day by day.
If you are an investor looking to earn high-interest rates without taking significant risks, it is worth considering peer to peer investment. Many people are taking advantage of lending money to the borrowers directly. But there are investors who consider private lending as a high risk. This article has compiled some main reasons that help you understand why you should invest in p2p loans.
Reasons To Invest In P2p Loans
Since the emergence of peer to peer lending, we have seen a rapid increase in its popularity. The reason behind it is that other investments tend to offer low-interest rates. As a result, it becomes difficult for investors to find investments that are safe and also provide competitive returns. For such investors, p2p investment proves to be a great alternative to traditional investments offering several benefits to investors and borrowers as well. Now let’s take a closer look at reasons to invest money in peer to peer loans.
Offer High Returns
In this era of low-interest rates, p2p lending provides an opportunity to earn high returns. You can even earn double-digit returns if you understand the process and take measures to mitigate risks. However, be mindful that these returns are not guaranteed, and lower returns can occur. If you diversify your investment portfolio, earning double-digit returns can not be a problem. Investors who are looking to make above-average returns can invest in p2p loans. No doubt peer to peer investment is a good way to earn a high-interest rate, but we suggest you do not invest all your money in this investment. To create a diversified portfolio, you should make this investment a part of your investment portfolio.
As we know, most investors are concerned about the risks of p2p investment. However, the risk in this type of investment is self-determined. Peer to peer lending UK platforms allows investors to choose the borrowers depending on their risk profiles. As an investor, you can set lending criteria and invest in loans according to them. Platforms display the credit scores and affordability of the borrowers, and it depends on you whether you invest in borrowers with low or high credit scores.
Moreover, you can spread risk easily because p2p platforms allow you to spread your investment across as many investors as you want. In this way, if a borrower defaults on the loan, you can continue getting profit from other loans. Some platforms also provide a cover against the default loans in the form of contingency funds. It also helps in minimizing the risks of defaults.
Ease And Flexibility
The process of investing money in peer to peer loans is simple and straightforward. That is why it is an ideal investment option for those who are looking to invest their capital in a convenient way. All the p2p platforms operate online, and you do not need to go to any bank or financial intuition; instead, you can invest by creating an online account. You can create and manage your p2p investment portfolio by logging into your account from any device anywhere. It is also possible to automate your investment process. In addition, p2p platforms also provide you with an opportunity to earn tax-free interest by opening an Innovative Finance ISA or IFISA account.
Source Of Passive Income
Another great benefit of investing in p2p loans is that you can make it a source of passive income. When you lend money to borrowers, they have to repay the loan amount plus the investment amount in monthly installments. As a result, you will receive a regular income and build an additional income that can flow automatically. In addition, if you are already earning passive income through rental income or dividends, you can expand your portfolio by investing in peer to peer lending.
An additional benefit about this investment is that it can keep on providing profit when the economy is in recession. Unlike stocks and shares, p2p loans are independent of economic fluctuations.
Less Number Of Fees
There are only a few fees associated with p2p investment. All the platforms operate online, so the operational cost is less, resulting in benefits for users. Now there are dozens of p2p platforms in the UK, and you can choose the cheapest and best ones by making when you invest in bank loans or stocks and shares, you have to pay a large number of charges. But it is not the case in peer to peer lending, and the interest that you earn will not be eaten up by the high investment costs. Although p2p platforms charge some fees from both the investors and borrowers to keep their business running, they are always less than other forms of investment.
In conclusion, we can say that peer to peer lending is a flexible, convenient, and cost-effective investment compared to traditional investment methods. It offers a number of benefits to the investors, including high-interest rates, diversification, freedom to choose borrowers, investment through IFISA, and earning interest within a tax-free wrapper. However, like all other investments, there are some risks associated with peer to peer investment, including the risk of default and platform risk. These risks can be avoided by taking proper measures. Once you understand the risks and take measures to mitigate them, you can get the best out of your investment and make it your regular income source.