When I think about lendingto friends and family, I cringe a little.
After all, lending to "regular" people you know is fraught with emotional pitfalls as well as the possibility that you won't ever get yourback. And you usually don't even earn interest on such .
I'd much rather lend money to strangers -- and I do.
How is that possible? Well, I'm going to tell you in just a minute.
There's a revolutionary way to earn returns that have the potential to beat the stock market (or at least ). It all hinges on your willingness to lend money to complete strangers. And here it is: peer-to-peer lending.
Over the course of the last few years, I've invested a portion of my portfolio in peer-to-peer (P2P) lenders) with borrowers.. P2P lending sites such as Lending Club and Prosper match investors (
As an investor, you have control over the types ofyou invest in. Each is divided up into $25 increments, called . So, if someone wants to borrow $2,500, 100 people can help that . Because you are only risking a small amount of money on each , if there is a you aren't impacted as greatly.
If the borrower is fully funded (and he has to be in order to get any of the money), the funds are disbursed and the borrower begins making payments. The P2P lending site figures out your portion of the and interest from each payment the borrower makes and it in your account.
You can then choose to withdraw the money or reinvest it in other.
Now, when you invest in P2P investment. Many P2P investors start out by sorting by . All borrowers are assigned a "grade," with "A" as the best and "F" or "G" as the worst. Someone with good pays less interest, so you earn less interest., you need to do your research -- just as you would with any other
As with other investments, the higher the potential returns, the greater the risk. Most of my are invested in initiated by those with "B" credit, although I also have some with "C," "D," or "E" credit. I have also invested in those with "A" credit. Interestingly, most of the write-offs I have are those with "A" credit. It's one of the reasons I started shifting more of my to those with "B" credit.
While credit ratings can help determine whether or not a borrower represents an acceptable risk, it isn't everything.
You should also read the stories associated with the borrowers. Look for borrowers who share the purpose of their debt; I consider large debt consolidation riskier -- even if the borrower has "A" credit.and can articulate a plan for repaying the . I like to invest in from borrowers who plan to use the money to start businesses. I also occasionally invest in those consolidating relatively small amounts of
It makes sense to compose a P2P lending portfolio with a range of credit ratings, depending on your risk profile.
Adding a portion of higher-risk asset allocation can boost your overall returns, while lower-risk can provide you with a degree of stability.to your P2P
Through the economic downturn and the stock market difficulties following the financial crash, my P2P year, but they are still respectable, and they certainly beat and .handily beat the stock market. My annualized returns haven't beat the stock market this
As of this writing, the 10-year Treasury yield is 2.9% and the three-year (a common term length for P2P loans) Treasury yield is 1.71%. Compare that to the current return cited by Lending Club for an "A" loan: 7.6%. If you are willing to take risk on someone with "C" credit, the potential return jumps to 15.24 percent. If you’re ready to give someone with "F" credit a chance, you could see potential returns of 22.59 percent. But, even though that kind of return is likely to put stars in your eyes, remember that your risk of default is higher.
Iin P2P , like any other , comes with risks. The most obvious risk is that of default. Lenders might not come through on the , and you lose your remaining , on top of the interest you would have earned.
Another risk, though, is the illiquidity. You can't just sell your mutual funds. You have to wait until enough of your start paying out before you can even think of withdrawing money. If you invest in P2P , you need accept you lock in your money.like you can or in
The IRA. Sign up with a well-known site like Prosper or Lending Club, and you can start earning reasonable returns by lending money to ordinary people.Answer: P2P an interesting way to diversify your investments. You can even hold P2P in an