How to Get Started With Peer-to-Peer Investing

One of the greatest achievements of the Information Age is that it facilitated peer-to-peer investing. Lenders who are interesting in earning a few bucks on the side can help borrowers who don’t want to go through the hassle of applying for a formal bank loan. As a result, lenders earn interest on their investment and borrowers get the money they need. Everybody wins.

Here’s how you can get started with peer-to-peer lending.

What Is Peer-to-Peer Lending?

Before you dive into a peer-to-peer lending agreement, it’s a good idea to know what it is. Peer-to-peer lending is an online market that brings borrowers and lenders together. A borrower who’s looking for a loan applies for it on a website and various lenders decide whether or not they want to fund the loan.

And this is where it gets really cool. Lenders don’t have to fund the entire loan. They can just fund a portion of it (usually as little as $25). Then, other lenders can chip in an amount that they want to fund as well. If the amount that the borrower was asking for is fully funded, then he or she gets the loan and the lenders start earning interest on the portion that they loaned.

To keep things honest, the peer-to-peer lending platform will run a credit check on the borrowers. That way, if someone has bad credit, the lenders can receive a better interest rate on the loan because they’ll be assuming more risk.

Diversify

Peer-to-peer lending is no different than other investments in this way: it’s best to diversify.

Sure, you might come across a borrower who’s got a great credit rating and think that nothing could possibly go wrong if you fully fund the loan yourself. Think again.

If you put all your eggs in one basket, you’re going to lose a lot of money if that borrower defaults. Your peer-to-peer lending company will probably pursue legal remedies, but it’s not likely that you’ll see that money ever again.

Instead, put some money into one loan, then additional money into another loan, and so. Every now and then take a shot down the field and loan money to someone with poor credit. You might be surprised that the borrower comes through and you get a great return.

Also, if you’re into socially responsible investing, you might come across some truly heart-breaking stories about why people need the money. Feel free to lend the money in that case and not worry about the return.

Reinvest Your Returns

As with mutual funds and savings accounts, you have the opportunity to reinvest the income that you receive from your peer-to-peer lending efforts. Take advantage of that opportunity to maximize your return.

If all you do is keep the cash that you earn as interest, then you’re limiting your total return over the long haul. Make the smart choice to build on your investment success with additional investments.

You don’t have to be a financial expert who can convert pounds into dollars in your head to make money with peer-to-peer lending. With just a little bit of up-front due diligence and smart investment choices, you can enjoy a significant return on your many investments.