#007 Become The Lender, Not The Borrower
10/15/22
Read time: 5 minutes
Peace and Happy Saturday!
Good Morning and welcome to 7-Figure Saturdays!! Today I’m going to break down Peer to Peer Lending. It could be a good way to diversify your investment portfolio. Or this could just be some good financial knowledge to tuck away for later.
But let’s get this out of the way first… 🥇
P2P lending is an investment and holds risk (you could lose your entire investment). And as with any investment there are no guarantees.
With that being said... I don't recommend you do any heavy investing until you have completed the following:
1-3 to 6 months emergency fund saved.
2-Have the proper amount of life insurance to protect your family.
3-Educate yourself thoroughly on the asset your investing in. You should understand it well enough to explain to a child.
Alright stepping off my soap box. 📣
So what the heck is Peer To Peer lending? The simple definition is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer platforms can help you make a difference with your investment, by helping others that need funding. Instead of going to traditional funding routes like banks they can come to us—their peers.
The global peer to peer lending market was worth $83.79 billion in 2021. And it is expected to reach 705.81 billion by 2031.
How does it work?
1-First you find a platform. Here's an article that shows some to check out: https://www.adamenfroy.com/peer-to-peer-lending
2-Second, an investor opens an account with the site and deposits a sum of money to be dispersed in loans. The loan applicant posts a financial profile that is assigned a risk category that determines the interest rate the applicant will pay. The loan applicant can review offers and accept one. (Some applicants break up their requests into chunks and accept multiple offers.) The money transfer and the monthly payments are handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.
3-You wait for your payments to come in.
What should you look for in a peer to peer platform?:
Loan minimums and maximums: Many platforms have a set minimum loan amount, such as $1,000 or $4,000. They may also put a cap on the loan, which could limit the investor’s earning potential.
Full or partial investment: Some platforms allow investors to fund partial loans, often called “notes,” while others require them to fund the entire loan.
Default rate: According to a 2018 survey, the average default rate on P2P loans was 4.52%. Some platforms have a lower or higher default rate.
Qualifications of borrowers: Some platforms have minimal requirements for borrowers, making them riskier to invest in. Do the platforms check borrowers’ credit reports? The best platforms are those that consider their borrowers’ credit score, financial history, income and other qualifications.
Interest rates: APRs range from around 6% to 35.99%.
Loan terms: Most loans range from two to five years and can be repaid in weekly or monthly installments.
Fees: Some platforms charge a fee (usually 1%) to their investors. Other fees include origination fees, though the borrower is usually responsible for that. In some cases, a site may have a prepayment penalty.
Average ROI: The return on investment varies based on site, but the average ROI is between 7% and 11%.
Investor qualifications: In some cases, the investor must be accredited. In other words, they need to have a certain income before they can invest.
Diversification: Some P2P platforms allow the investor to establish an IRA, Roth IRA or rollover 401(k) account for potentially higher returns.
Peer To Peer Lending Pros: 📈
-The average annual return on investment is between 7% and 11%.
-Better returns than savings accounts or CDs.
-Connect borrowers directly to lenders.
-Some P2P sites have contingency funds that may be used to pay the investor what they’re owed if the site goes under.
-It’s a way to help those who may have otherwise had to turn to lenders with high-interest rates, such as payday lenders.
Peer To Peer Lending Cons: 📉
-Default rates higher than traditional finance loans.
-Will take time to receive your return.
-Early or late loan payoff could result in a lower return on investment.
-Profits are often taxable as income.
-The platform could go out of business, which could result in major losses if there aren’t contingency funds.
Eric, you giving us game about Peer To Peer Lending but have you done it? ✌🏾
Yes, I just set up an account and getting started, will report back in a few months.
Respect to you for spending 5 minutes to build your Financial IQ. If you have any questions, shoot them to me at emcloyd@hubriswealth.us.
See you again next week.
Whenever you are ready, there a few ways I can help:
Seven Steps To Seven Figures e-book: https://ericmcloyd.gumroad.com/l/ptxrz
Fractional CFO services: business plan development: https://calendly.com/emcloydyourcfo/business-goals
Podcast Episodes About Financial Topics: https://podcasts.apple.com/us/podcast/id1513018018?mt=2&ls=1
Daily personal finance content: https://www.linkedin.com/in/ericmcloyd/
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