Peer-to-peer lending is a relatively new form of investing but is growing increasingly popular. There are many reasons that draw people to it, which we will shed light on in this article.
In particular, it’s the opportunity to build a regular income stream without much effort from your side. That’s why in this article, we’ll share the four reasons why investing in P2P loans is a great way to start earning passive income.
Explanation of P2P lending
P2P lending stands for peer-to-peer lending, so essentially lending money from person to person or multiple people to one person.
This allowed retail investors to participate in the loan market, which was previously reserved only for banks. And borrowers who might not have gotten a loan with a traditional finance institute had the chance to take on a loan.
That’s how it started, at least. Nowadays, the cash flow is a bit different. Loan originators issue the loans directly to their borrowers (consumers or companies) and then offer these already-filled loans on a P2P marketplace.
When you invest in a loan on a P2P platform like Lendermarket, you’re essentially giving money (a loan) to the loan originator instead of the singular individual.
This offers a few advantages, such as the loan originating company being able to offer a buyback guarantee: If a loan defaults, the company will buy it back and pay back the principal and all outstanding loans.
But let’s get into the reasons why P2P lending is great for building passive income.
Reason #1: Probably the EASIEST WAY to start earning passive income
Peer-to-peer lending is an incredibly simple way to start generating a passive income for reasons such as having low barriers to entry as well as the good user experience of the platforms.
Low entry barriers
With many investment vehicles, you either need a lot of money (look at real estate or business investments) or it’s complicated buying them (you need a brokerage account etc.). P2P lending allows you to get started with just 10 EUR.
That’s the minimum amount you require for investing into loans on Lendermarket.
Easy to use platform
Signing up on Lendermarket and getting ready to use the platform doesn’t even take 20 minutes. You create your account, verify it, and you’re ready to make your first transfer to fund it.
The user interface is self-explanatory, and there are no thousand checkboxes you have to click or warning messages to read.
Minor time investment
If you want to build passive income, then it’s common to hear things like: “Oh, first you got to work a few years very hard, and then you can earn passive income.” When investing into loans, you pick which loans look interesting to you and invest into them. No need to study the company sheet of the share to see past performance, dividend ratio and so on.
Reason #2: Investing in loans is a TIME-EFFICIENT investing strategy
Once you get started with P2P investing, you will not only see results fast, but there’s also little to no maintenance required.
Auto invest and reinvesting features save time
If 10 EUR is the minimum amount to invest, and you want to invest 1000 EUR, it would take ages picking 100 different loans for best diversification, right? Nope! Auto invest makes it a matter of 5 minutes.
The auto invest feature on Lendermarket allows you to specify certain investment parameters (e.g., return rates, min and max investment per loan) and will then automatically invest your funds according to them.
If you tick the “reinvest” box, the returns from the loans will also be reinvested on autopilot, without your doing. You can learn how to make most out of Auto Invest in our quick guide.
Investing in loans brings fast results
In general, your loans will be paid back monthly over a certain period of time, meaning you will get money every month (more on that in the next section). So, already after 30 days you can see the passive income flowing into your account.
If the loan enters the extension period because the borrower needs more time to pay back, this pay back can get delayed. You can find more information on it here.
Reason #3: Investing in loans is a FIXED-INCOME INVESTMENT
When you put your money in the stock market, it’s normal to see the value of it go up and down. If you invested into growth stocks without dividends, then you will only see a payout once you sell (or a loss).
With P2P loans, you get your distribution every month. And how much you get is easily calculable by the amount of money you invested and the average interest rate of your loans. This means it’s a more or less fixed-income investment (bar the exception mentioned above).
Reason 4: Investing in loans has the potential for HIGH RETURNS
Currently, the average annual return of P2P loans on Lendermarket is 15.26%, this is higher than traditional asset classes such as stocks, bonds, or even real estate.
How big your returns will be depends on the types of loans you invest in. Business loans tend to offer a lower interest rate than consumer loans. The latter even have interest rates up to 18% currently on Lendermarket.
Check out our blog post on long-term investing benefits to see how this interest rate can pan out over a longer period of time compared to just saving the money.
Of course, not all loans offer these returns and if you only want to invest in real-estate backed loans, you’ll find interest rates on Lendermarket of 8 – 9%. Still a very decent fixed-income return.
If you have money on the side to start building a passive income, don’t want to start at zero and see fast results, then investing in loans might be a good choice for you.
P2P investments are time-efficient, available from just 10 EUR, have potentially high returns and can offer a fixed income stream that doesn’t fluctuate too much.
Find out more about Lendermarket and get started with your P2P investment, good luck!