Social/P2P Investing – What? How? When?

By: ispeculatornew
Date posted: 02.20.2012 (5:00 am) | Write a Comment  (2 Comments)

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I have discussed passive income quite a few times in the past months and clearly, dividend investing is a great way to get passive income that can grow over time. I have also looked at alternative ways such as fixed income investing, real estate, etc. There is one other way that you might have (or not) heard about. It is Peer-To-Peer Lending or Social Investing.

What Is Social Investing?

I think it’s very easy to think that this product is more complex than what it really is. Let’s go back for a second. One of the biggest impacts the internet has had in the past few years is take out middle actors that only take a cut. How? Buying a product like clothes or games directly from the company that produces it is one way to get it done. If you buy a shirt from the Nike or Adidas website, the company saves in many different ways as there are less costs involved.

Take Out The Banks

Think about it for a second, you, I and millions of others deposit money in our bank accounts, leaving it there for weeks, months and sometimes years. What interest does the bank usually give you on that balance? 1%? If you’re lucky, maybe. If you are using a company like ING, maybe a bit more.

Now, what does the bank do with that money? Many things but its main use is lending out that money to individuals and companies. So let me ask you another question. If you go to your banker and ask for a loan to help pay your studies, to start a small company or to help your loved one get medical treatment, what kind of rate do you think the bank will charge you? 5%? 8%? 10%? It depends on many factors, mainly your risk profile and credit rating of course.

But you can see how the bank takes a very big cut.

Take Out The Bank

P2P lending or social lending and investing is built on the idea that both lenders and borrowers would be much better off if they could deal with each other instead of going through a bank that will take a huge cut. These sites can be used to borrow money and/or lend it out. Since this is an investment blog, I will only discuss the lending/investing part of it.

Generating Passive Income

One of the good ways to generate passive income would be to invest money on a social investing website. How is it done?

Step #1-Send money over

This is similar to opening a broker account

Step #2-Choose who you are lending to

This is the more challenging step. You will be able to see the profile of those borrowing, what they intend to use the money for, their credit rating, etc. I personally think the key to all of this is to diversify your loans as much as possible. You do not want to spend 10 hours trying to determine who to lend to but putting your entire amount on 1-2 borrowers doesn’t sound like the greatest idea either. I would diversify as much as possible and personally would prefer investing in high quality borrowers to start off, even if the interest rates will be lower.

Step #3-Monitoring The Loans And Reinvesting Money

This is actually very similar to building a dividend portfolio. Over time, you would look to increase the diversification and the size of your portfolio.

How To Get Started? Since social lending and borrowing is fairly new, it is very complex for websites to start operating everywhere and in the US and Canada, they must go state by state or province by province. It will get much better over time as regulators get a better understanding of how this works but it is already available in many locations. Here are some places that you could try.

LendingClub
Prosper
Communitylend (only Ontario for now)

Beware

Since social lending remains fairly new, there are obviously risks involved, which seem to be compensated by the higher rewards but it’s still worth being very careful. I will likely try to get started in the near future and will certainly keep you posted.

Have you tried this from a borrower or lender perspective? If so, how was that experience?

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2 Comments

  1. Comment by Dencha — February 21, 2012 @ 3:59 am

    Thanks for this post…it’s my first time hearing about P2P investing! Very interesting!

  2. Comment by IS — February 22, 2012 @ 12:09 am

    @Dencha – You are more than welcome, plan to give it a try?

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