WARNING: Why Peer To Peer Lending is a BAD INVESTMENT
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Peer To Peer Lending websites such as LendingClub and Prosper seem like a great investment…however, these are some of the concerns to watch out for. Enjoy! Add me on Instagram: GPStephan
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For those of you who aren’t familiar with what Peer to Peer lending is:
These are websites like LendingClub and Prosper that act as an intermediary to match people who need to borrow money, with people who have money to lend. They’re pretty much offering YOU the opportunity to be the bank for someone else, and get paid back that interest.
However, these are my concerns:
First: Fees. As an investor, lending club charges a 1% fee on any payments you receive from the borrower…so already, whatever return you WERE getting, is now reduced by 1%.
Second: Defaults. If a borrower DOES NOT pay their loan, lending club charges a 40% fee on any amounts collected on a delinquent loan that went to litigation. According to them, they have an approximate default rate of about 7.8%. And keep in mind since the borrowers agreement is between themselves and lending club…not YOU and the borrower…you can’t do anything about it. You have no recourse.
Third: Lack of liquidity. Once you invest in a note, technically you’re tying up your money for 3-5 years until that loan matures…and that also assumes the borrower pays off the loan in time. If you need your money sooner, you’re forced to sell your loans on the secondary market…usually for a steep discount,
Fourth: Taxes then become an issue because your returns are seen by the IRS as ORDINARY INCOME, meaning they’re taxed at your highest marginal tax rate. And depending on how much you make, this could be a lot. Compare this to long term capital gains, which for most people is just a flat 15%.
Fifth: Risk of analyzing borrowers. Many P2P sites assume no risk in analyzing the credit worthiness of the borrowers. And this seems like people can easily take advantage of this.
Sixth: Default rates like this will ABSOLUTELY be going up if the economy begins to decline. The FIRST THINGS people stop paying is unsecured debt, like personal loans and credit cards…This leads me to think that whenever our economy begins to falter, the returns you’ll see on peer to peer lending websites will drop substantially, and at a time when you’ll WANT to have access to your money to invest in other opportunities, but you can’t because your money is tied up on these websites.
It’s for all of these reasons, you should do your own research to determine if peer to peer lending is right for you.
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Are p2p Lending Risk-Free, WARNING: Why Peer To Peer Lending is a BAD INVESTMENT.
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There are many safe bonds and there are many junk bonds out there. As a way to help you rebuild your credit rating, many banks offer secured credit cards. You must also consider that risk-free Investments are not high earners.
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Investing can start to become more personal by checking in with yourself. It can cause a serious amount of rift in the family f you do so as this is based completely on trust. The haves have abundant financial resources in the form of assets.
Investment planning is important from the point of view of your future. The planning cannot be done in just one day and you will have to take smaller steps towards attaining investments that work well for you. Here is some information about how to plan for your investments.
Peer to peer lending, or p2p Peer-to-peer lending investment for short is gratifying because you are investing in other people. Your money is being used by other people who are trying to improve their lives, whether it is through getting out of debt, funding a business or using that money to improve their home. Each borrower has a story, and based on that story, you can choose a borrower that you can relate to or just want to help out.
In today’s real estate market, many LTV’s are between 50 – 60%. This means that real estate values would have to drop by half before your principal investment would be at risk. At no time in history has this ever happened, so for the most part, this is considered a very acceptable risk. On top of this, there is a second layer, or level of protection for investors. It’s called the Buyout Agreement. This is a contract whereby you are guaranteed to get your money back if the borrower defaults for any reason on your note. Keep in mind that this second layer of protection is not offered by most trust deeds, so you must ask for it.
The major idea with Peer-to-peer lending is that you will usually find lower rates plus you avoid much of the complications that occur when you go through a bank. “P to P” lending is not a haven for those with bad credit or those seeking to avoid scrutiny; but it might be something to get your started.
Just remember that you should not make investment to somehow get instantly rich. This is most risky investment and there are chances that you may lose your hard earned money. If this was that easy then everybody would have been a richer person!. Make wise Investments for a long term and allow your funds to grow. Make short term investments if you know that you may need funds in between for your personal needs and stick with fully safe instruments like CDs (Certificate of Deposits).
Of course, Kiva does due diligence research before adding prospective loan recipients to the pool and all of the money you put in goes toward the loan process – Kiva’s low overhead is covered by interest charges (if any) on the loans, fundraising and donations. So far, Kiva’s payback percentage has been 100%, although the microfinance industry average is 97% so there’s always a chance, however small, that you won’t get your money back.
Peer to peer lending for small business has its place. For a person looking for just some start up money or just to expand, it could be ideal. Also, there is no guarantee that it will be funded so the borrowers need to sell it. If you are thinking about applying for a peer to peer loan be very clear on what it is for and what are your goals. This is a sign of a person who has direct and makes for a more confident business proposal.
The best investment strategy is to own all of the above. The common few include stocks, real estate, bonds and even starting your own business. Choose a vehicle that will aid you in achieving the goals that you have set.
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