Is it worth it to start investing via P2P lending platforms?

Even though it is still relatively new, P2P lending as an alternative investment has become a popular and an excellent way to earn passive income and reach financial freedom. This type of alternative investment is preferred by many individuals over the traditional investment due to the fact that it requires lower fees and provides a greater return on investment. However, peer-to-peer lending involves certain risks in the investment process which often leads to the question – is it worth it to start investing via P2P lending platforms?

What Is P2P Lending

To begin with, P2P lending stands for peer-to-peer lending, or to be more precise the process of lending or investing in smaller companies or individuals. The P2P investment process includes a lender who can be an individual investor and a borrower – another individual or a business who receives the investment. So, is investing worth it?

P2P lending as an alternative investment solves two problems. On one hand, anyone can join this type of lending platform and put their investment in a project without a middleman which usually is a bank or lending institution. On the other hand, a P2P lending platform can help a borrower to support and grow their business. 

Difference Between P2P Lending and Crowdfunding

Quite often P2P lending is identified with crowdfunding due to the fact that these two are in fact very similar processes. The main difference though is the end goal. Crowdfunding is primarily used to raise money for a project, without venturing capital, while through peer-to-peer lending the investors buy loans with the purpose of gaining profit and receiving the principal back with interest included. 

How Does Investing Through P2P Platforms Work

As mentioned above, P2P platforms connect regular people or ‘peers’ together in a way that anyone can lend and borrow money. P2P platforms offer the opportunity for borrowers to apply for a loan and to the investors to acquire a higher return on investment compared to traditional investing. 

But how P2P investment stands out from the other types of investment?  

Simply put, investors can spread out their investments across the platform. When investing through P2P platforms investors use so-called ‘notes’ which represent small portions of the loan. A note can have a denomination as small as €25 and if you invest €10,000 you can spread our investment through 400 notes. This means that with one investment you can help multiple borrowers at the same time.

It’s also worth mentioning that there are certain criteria that you need to meet in order for you to become an investor at a P2P platform. Usually, you need to be an accredited investor, or some platforms require earning a certain minimum yearly income in order to accept your investment. 

Benefits from P2P Investing

If you are still wondering why investing via P2P lending platforms is so popular and preferred by investors nowadays, let’s review the benefits of P2P investing.

  • Higher return on investment
  • Build your own portfolio
  • Support small businesses or individuals by lending money
  • Opportunity to invest small amounts of loans 
  • Diversify loan portfolio by spreading money into multiple loans
  • Spread your investment across the platform

Potential Risks Involved in Investing via P2P Lending Platforms

Unfortunately, as is the case with any type of investment, P2P investment also carries some potential risks. Some of the risks involved in investing via P2P lending platforms are:

  • Losing money – a potential to lose your entire principal; 
  • No guarantee of safety – your investment is not insured by the European Forum of Deposit Insurers (EFDI) and you will not be reimbursed in the event of borrowers default;
  • P2P performance hasn’t been tested in a recession, so there is no data on the success of P2P investments during an economic crisis;
  • The funds are not lent immediately which includes a delay in earning your interest. 

How to Balance the Benefits and Risks of P2P Investing

Knowing the risks involved in P2P investing shouldn’t stop you from doing it. Luckily, there are some methods to be successful in P2P loans, or in other words to maximize returns and minimize the risks. Here are the suggested methods:

  • Diversification – invest in different financial industries or categories;
  • Spread out your investment returns – invest in top-grade loans as well as in lower-grade loans;
  • Reinvest the loan payments you receive. 

Implementing these methods in peer-to-peer investing may significantly reduce the risks of losing your investments and should help you increase your returns.

Bottom Line – Is Investing via P2P Lending Platforms Worth it

In conclusion, investing via P2P lending platforms is worth trying out as it offers many different options. P2P platforms work great for everyone. Choose to invest with a hands-off approach and expect a predictable interest rate, or get more control over the amount of money that it is used. Both ways can provide a certain income for you. 

As long as you are aware of the potential risks and you incorporate the methods to mitigate them, the alternative investment via P2P lending platforms can be an excellent addition to your portfolio.