Peer to peer lending is one of the latest ways you can invest your money. P2P lending has become a popular venue for investors and savers alike wanting to get more from their money. However, before you begin investing in peer to peer lending, you need to know the advantages and disadvantages of this process. Below, we discuss what are the pros and cons of peer to peer lending investment.
Peer to Peer Lending and How It Works
What are the Advantages of Peer-To-Peer Lending?
In peer-to-peer lending, you can select who you want to loan to. Consequently, you can choose debtors who have property or a business as your surety. If you can choose sound investments where the returns offset the risk, P2P lending is for you.
2. Tax Efficiency
The interest you receive from peer-to-peer lending is already added to your taxable income and is deducted accordingly. The Innovative Finance Individual Savings Account (IFISA) incorporates your peer-to-peer lending in a tax-free cluster. As such, any interest you obtain is already tax-free.
3. Very High Potential Returns
Peer-to-peer lending can have the potential of being high-yield investments. Additionally, these investments are quite short, typically lasting 12 months. This means that you can easily and quickly acquire your initial investment.
4. Good Potential Yield
Other than being a high yield investment, peer-to-peer lending is also considered to be quite a good investment. The percentage of return is considered high, especially when compared to a street-level savings account with your bank.
5. Fairly Low Risk and Reliable
As an account-based investment, its reliability is quite good. Some of the bigger investment platforms assert that none of their stakeholders lose their investment. This is because they cover the financial cost if investments don’t live up to expectations.
6. Borrower Selection
Borrowers are meticulously credit checked. Most often, only a small percentage of these borrowers get through. This gives you the assurance that you get quality borrowers to invest in, which frees you from worrying about the possible risk or credit runaway.
What are the Disadvantages of Peer-To-Peer Lending?
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1. Fees Apply for Early Exit
In peer-to-peer lending, charges apply when you cut short your investment. In addition, you may only exit if the scheme can find other investors to secure your part of the loan. It’s advisable to only invest when can completely commit to the duration of the loan.
2. High-Risk Potential
If this scheme has a low-risk potential, it will also have a potential to be a high-risk investment. This is due to the ability to invest in small businesses, which have a high-risk potential. However, diversification of portfolio can counter this risk.
3. Cash Investment
There is also a possibility that your cash investment may not be lent instantly. If this happens, you won’t be earning interest from your investment. Nevertheless, the overall impact on your investment will be minimal in the long-term.
4. Time Restraints
Dealing with a diversified portfolio can be time-consuming. You should only manage what you can handle. You may want to consider a managed direct lending scheme if you want to handle a large portfolio. These are experienced investment individuals who select and diversify the loans for you.
5. Investment Risk
Your cash investment may also be at risk with this scheme. Peer-to-peer lending has no guarantor, unlike like the federal government, which protects normal banks. You may face losing your capital when an investment fails.
Want to know more about peer-to-peer lending? Watch this video from One Minute Economics:
Peer-to-peer lending is an alternative investment without the hassle of traditional investments. However, it does come with its own unique advantages and disadvantages. Therefore, it is up to you to learn how to invest intelligently and sidestep the risks involved in this investment.
Do you see other peer-to-peer lending advantages or disadvantages you want to share? Let us know your thoughts in the comments below.