In my continued quest to add to my passive income flows, I’m looking into different alternatives that could both increase and diversify my revenues. As a person that is truly interested in investing as well as new technologies/services, you probably won’t be surprised to learn that I’ve started looking into P2P lending.
What Is P2P Lending/Borrowing?
If you take a step back and think about the business of banks. Most of us hold some money in the bank and get paid some (very very small) interest every month. The bank then turns around and loans out that money to borrowers that are looking to buy a house, a car or start a new project for example. They might make 5% and even 10% spread on that business. As you can imagine, there is an opportunity for disruption there and P2P lending/borrowing sites are now making that possible. They serve as a middle man between borrowers and lenders charging a fraction of what a bank might do.
The business is really picking up too. Lending Club, one of the big names recently surpassed $1B in loans.
As you can see from this chart:
The easiest comparison is to high yield bonds. You are generally getting high returns but have more risk than if you were lending to a government (through govt bonds for example).
Maximizing Risk vs Reward
The key obviously is to maximize the risk-reward ratio. How?
-Diversifying risk (spreading an investment through 10-20 or more borrowers)
-Doing proper research (in this case you’d look at the profile of the borrowers, their credit rating, employment history,previous loans, etc)
-Analyzing your portfolio (through tools such as this one) and optimizing it
I do know of a few people who’ve been using it with success getting returns of over 10%. I think you’d probably expect to have a few non-payers but iit should not be a significant portion if you’ve done your homework. From their site, depending on the quality of the borrower:
Grade A: 5.66%
Grade B: 8.89%
Grace C: 10.27%
How I Will Likely Try This
I’m still looking for information about the different websites, how it works, how to optimize returns, etc. I do hope to be able to open an account, probably later this year to test it out. I’d probably start off very small ($2K perhaps?) just to test things out but I do think this could provide another well diversified income stream at some point in the future.
Have Any Of You Tried This? Either From The Perspective Of Borrower Or Lender? I’d love to hear more about it if you have
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