This exciting source of passive income is growing portfolios everywhere. It’s also helping borrowers get out of debt faster.
We’ll show you the best ways to use p2p lending for passive income or for reducing debt faster.
How to Use P2P Lending to Pay Off Debt
P2P lending rates are often lower than bank loan rates. The reason for this is largely due to low operating costs.
P2P lending companies don’t have to deal with oodles of bank locations or thousands of employees. Their funding comes from investors, and their processes are usually managed by a smaller team in one location.
As a borrower, you can take advantage of these lower rates. You can use them to pay off higher rate interest cards and loans and save yourself thousands of dollars in the process.
Asking for Small Personal Loans:
P2P lending starts when you need a loan for something. You might want an alternative to the traditional bank.
Or, you may simply be looking for the lowest interest rate.
The loan can be for anything: A new business, getting out of debt, a new construction, etc. Once you sign up with a peer to peer site and ask for a loan, you become the “borrower”.
You agree to pay the loan back at a certain rate of interest and in a certain period of time.
On the other side of things are the “investors”. The investor (or investors) basically acts as a bank. They will sponsor the loans with their own personal money as if they were a bank.
Depending on the p2p company and your loan details, your loan might be funded by one investor or by several investors.
Once the money is lent, you pay back the loan based on the terms you agreed upon, just like with a bank.
The only difference is that when you pay the lending company, they pay the investors the principal amount they contributed, as well as interest.
The P2P site makes its money by taking a small percentage of the interest on each loan. This is their fee for brokering the transaction.
Rate of Return on Investment:
Like we mentioned, each loan will carry a set amount of interest that will be charged, just like a bank loan would.
The interest rate of your loan will largely depend on your credit rating. As you might guess:
- Borrowers with great credit will pay the lowest interest rates (say around 6%)
- As a borrower’s credit becomes worse, the interest rate they pay becomes higher (sometimes over 30%)
Do you have high interest debt you want to pay less interest on? Or do you need to borrow money for another purpose?
If so, consider p2p lending companies like the ones we’ll talk about below. But for now, let’s talk about how p2p lending can help you create a passive income source.
How to Use P2P Lending to Get Passive Income
As I talked about earlier, investors who put money into p2p lending companies lend the money to borrowers.
Each time a borrower makes a payment, you as an investor get a portion of your investment back – including interest earned.
It’s the magnitude of these interest rates that really attract investors. Because they are so significantly higher than that of CD’s and bonds, investors will risk sponsoring such loans optimistically hoping they can capture a slice of these returns.
Since its inception, peer to peer investing has often been quoted as producing anywhere between 5 and 12% returns! When you compare that figure to the 10% average growth rate of stocks, P2P investing doesn’t come across as a bad return on investment.
These scheduled payments of interest and principal have been hailed by many passive income enthusiasts as a wonderful alternative to traditional forms of investing. For example, while stock market returns may fluctuate day to day, p2p loans will on average provide consistent and steady returns.
Reducing Risk By Diversifying Borrowers:
As is the case with any loan, there is the risk that the borrower could default. This would mean that they fail to pay back the principal and interest that they owe.
When this happens, usually the P2P site will send the borrower to claims to try to recoup the money that is owed. However because this personal loan is unsecured, it is often the case that the money is simply lost.
This is why it is very important for an investor to pay attention to the credit rating of the borrower. Even though the borrowers with good credit produce the lowest returns, then do have the highest probability of paying back their loans in full. Investors with poor credit have the highest chance of failing to meet the obligations of their loans.
One strategy to combat this situation that has developed over the years is to diversify the number of investments you make.
For example, typically if a borrower needs $10,000, they will not receive the entire $10,000 from just one investor. The money for that loan will come from many investors in the form of $25, $50, and even $100 increments (called notes). By spreading their notes across many different borrowers, P2P investors can minimize the risk of default.
The Top Peer to Peer Lending Sites:
Not only are peer to peer sites a great place for borrowers to find the best personal loans, they can also be an extraordinary way for savvy investors to create multiple steady streams of passive income, or quickly find $2,200 in emergency cash.Currently the top two P2P lending sites are Prosper and Lending Club.
Prosper was the first site in 2006 and has been responsible for brokering over $3 billion dollars in small personal loans.
Lending Club has been around since 2007 and issued over $9 billion dollars in loans. Both sites are very similar in the way they function and have specific rates of interest as well as loan amounts that they offer for borrowers.
It is very important to note that not all places in the US and worldwide allow borrowing and/or lending from peer to peer sites.
Before you engage in either P2P lending or borrowing, make sure you understand if your local laws allows it.
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