Can You Make Money With Peer-to-Peer lending? | Is It a Good Investment?

Summary

In this video, Ahmad and Christina from Rich Journey discuss peer-to-peer lending, exploring how it operates within the shared economy. They delve into the process of lending money through platforms, the evaluation of borrowers, and the associated tax implications. They outline the pros, such as monthly income and potential for higher returns, and cons, like the risk of defaults and lack of FDIC insurance. The hosts express their skepticism about P2P lending as an investment, favoring more traditional and secure options like index funds and ETFs, and advise viewers to conduct their own research.

Takeaways

• 😀 Peer-to-peer (P2P) lending is a form of borrowing and lending money without the involvement of traditional banks.
• 💼 P2P platforms allow individuals to lend money to others and receive interest payments in return.
• 🔍 Borrowers are evaluated based on their risk profile, including credit history, score, and other financial factors.
• 📈 P2P lending can offer higher returns compared to traditional investments like CDs, bonds, and money market accounts.
• 🌐 Monthly interest payments from P2P lending provide a steady income stream, unlike some other investments that pay less frequently.
• 🔑 Diversification is possible in P2P lending, allowing investors to spread their funds across multiple loans with varying risk levels.
• ⚠️ There is a significant risk of default in P2P lending, and when defaults occur, investors can lose their entire investment.
• 🏦 P2P lending platforms are not FDIC insured, meaning there is no government protection for the funds invested.
• 💸 Investors are charged management fees by P2P platforms, which can reduce the overall returns on investment.
• 🤔 The actual return on P2P investments can be unclear, with estimates requiring significant assumptions and high-risk investments for higher returns.

Q & A

What is peer-to-peer (P2P) lending?

Peer-to-peer lending is a method where individuals can lend money directly to other individuals through online platforms, bypassing traditional banks. The lender earns interest on the loan, which is repaid by the borrower.

How are borrowers evaluated on P2P platforms?

Borrowers are evaluated based on factors such as credit history, credit score, debt-to-income ratio, bankruptcies, collections, and job history. Platforms rank borrowers from high risk to low risk, which helps lenders assess the potential risk of default.

What is the process for becoming a P2P lender?

To become a P2P lender, you first choose a platform, complete an application, and deposit money into the account. Once deposited, you can review borrower requests and decide to lend money based on your comfort with the borrower's risk profile.

What are some pros of P2P lending?

The pros include monthly interest payments, potential for higher returns compared to traditional savings accounts, and the ability to diversify by funding portions of multiple loans, spreading the risk across different borrowers.

What are the main risks or cons of P2P lending?

The cons include the risk of borrower defaults, the fact that most loans are unsecured (no collateral), lack of FDIC insurance on deposited money, and management fees charged by the platform, which can reduce your returns.

Are P2P loans FDIC insured?

No, P2P loans are not FDIC insured, meaning if the platform shuts down or the borrower defaults, the lender could lose all their money without any protection.

What kind of returns can you expect from P2P lending?

Returns vary based on the risk profile of the borrower, ranging from 3.6% to 13.9% according to platforms like Prosper. However, these returns involve significant assumptions and high-risk loans, making actual returns uncertain.

What is the impact of management fees on P2P lending?

Management fees charged by P2P platforms can reduce the returns for lenders. Even though you are lending money, the platform takes a fee, which cuts into the overall profits from the loans.

Why do Ahmad and Christina believe P2P lending is not a good investment?

They believe P2P lending is not a good investment because of the high risk involved, uncertain returns, and the availability of other investments, such as index funds and ETFs, which offer better returns with less risk.

What alternatives to P2P lending do Ahmad and Christina suggest?

Ahmad and Christina suggest investing in index funds and ETFs as better alternatives, as they provide higher and more predictable returns with lower risk compared to P2P lending.