### Argument #1: Concerns About Collateral
**Common Concern**: “What happens if the borrower defaults? These loans have no collateral!”
Yes, it’s true that P2P loans are unsecured and without collateral. But banks also regularly issue unsecured loans like credit cards and personal loans. They make a lot of money off these, and you can too by diversifying your investments. Lending small amounts to many borrowers minimizes your risk, just like banks do.
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### Argument #2: Comparing P2P Lending to Gambling
**Common Concern**: “You’re not investing! It’s just gambling. How can you trust random people to pay you back?”
P2P lending has rigorous underwriting standards similar to banks. Platforms like Lending Club and Prosper have detailed criteria for approving loans. Plus, you can use tools like Nickel Steamroller to see historical data and choose which types of loans and borrowers to invest in. This isn’t random guessing; it’s informed decision-making.
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### Argument #3: Has it Been Stress Tested?
**Common Concern**: “Has this asset class been stress tested? What will happen in another financial crisis?”
P2P loans are similar to traditional bank loans in structure and have withstood past financial crises. The only difference is who profits—individual investors like you instead of large banks. These loans are not new or untested; they are just a new way for you to participate in issuing them.
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### Argument #4: Are P2P Borrowers Riskier?
**Common Concern**: “The people applying for these loans must have bad credit. Why don’t they just go to a bank?”
Not all borrowers have bad credit. Many have creditworthy profiles but are looking for better interest rates or quicker approval processes. In fact, P2P platforms often offer more competitive rates to prime borrowers compared to banks. These platforms attract a wide range of borrowers, not just those with poor credit.
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### Introduction to P2P Lending
Hello, readers of My Money Design! I’m ARB, the Angry Retail Banker. Today, I want to talk about an exciting form of passive income that doesn’t get enough attention: Peer-to-Peer (P2P) lending.
P2P lending lets individuals lend money directly to other individuals, bypassing traditional banks. Major platforms like Prosper and Lending Club connect borrowers with investors, with people like you acting as the bank. This arrangement often results in returns between 5-12%, depending on various factors like loan choice and economic conditions.
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### Personal Experience and Returns
I started with Prosper over a year ago and added Lending Club a few months later. My returns have been solid: around 9.93% on Prosper and 12.84% on Lending Club. Although defaults do happen, the returns from other loans usually cover these losses and then some. Diversification is key to minimizing risk.
Even respected bloggers like Mr. Money Mustache have seen impressive returns, around 12.22%.
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### Tax Implications and Diversification
Be aware that P2P lending income is taxed as regular income, which can be a downside. However, both Prosper and Lending Club offer IRAs to help reduce your tax burden.
Diversify your investments by lending small amounts to many borrowers. This strategy minimizes the impact of any single default.
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### Regulations and Availability
Note that not all states in the U.S. allow P2P lending. Some states permit borrowing but not lending, while others have different rules for different platforms. Internationally, P2P lending is also growing, particularly in Europe and Asia.
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### Conclusion
P2P lending has its risks, particularly loan defaults. However, so do all types of investments. By diversifying and using available tools to make informed choices, you can mitigate these risks. This isn’t gambling; it’s a new way to invest wisely.
Thank you for reading, and a big thanks to MMD for the opportunity to share my insights on P2P lending.
