One of the biggest trends in investing over the past few years has been the rise of alternative investments, like peer-to-peer lending. Although regarded as a cousin of crowd funding, the two funding opportunities have a distinct difference.
Crowdfunding sites like Kickstarter and IndieGoGo do not repay the lenders with interest and principle. Instead, they offer rewards and incentives to help fund their projects. Peer to peer lending on the other hand, deals more with investors looking to invest their money for a solid return. Think about how a bank lends out money for a return on their investment. Peer to peer lending works like this for investors, on a micro scale.
Why Invest in Peer To Peer Lending?
- Reduce Risk: One of the clear advantages of a nontraditional investment strategy like this, is reducing your over-all exposure to investment risks. Using websites, such as Lending Club and Prosper, can reduce the risk of losing large chunks of your principle. For example, on Lending Tree, investors can invest amounts as low as $25 to invest in projects. They still receive the same rate of return as an investor who put in $100 or $1000. Providing added assurances, peer-to-peer services will vet the prospective borrower to help investors establish the worthiness of their loan. This way, you do not have to make a decision on lending out money to someone, without having all the facts.
- Earn Higher Returns. Lending club has interest rates between 7.7% and 24.6%, depending upon the rating of the loan. Loans are rated from A to G, depending upon the level of risk.
- Diversify Your Investment Portfolio. With minimum investments of only $25, an investor can spread investments of $1000 across 40 different loans. This minimizes defaults for investors on the peer-to-peer lending sites.
A Final Thought on Peer To Peer Lending.
As Peer to Peer lending becomes a more common form of investing, many investors will see the many benefits to in investing in alternatives which offer returns that equal or beat the return of the S&P 500, over the last 10 years.