Can You Make Money With Peer-to-Peer lending? | Is It a Good Investment?
Summary
TLDRIn 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.
Outlines
💼 Introduction to Peer-to-Peer Lending
Ahmad and Christina from Our Rich Journey introduce the topic of peer-to-peer (P2P) lending. They discuss how P2P platforms allow individuals to lend money directly to other people in exchange for interest payments. The video aims to explore the concept, evaluate borrowers, discuss taxes, weigh the pros and cons, and assess the estimated returns of P2P lending. The hosts share their personal journey to financial independence and invite viewers to subscribe for more content on money management.
📈 The Mechanics and Risks of P2P Lending
The script explains the process of P2P lending, where individuals can lend money through platforms without involving banks. Borrowers are ranked based on their risk profiles, and investors receive monthly interest payments. The video highlights the potential for higher returns compared to traditional investments and the ability to diversify across multiple loans. However, it also discusses the significant risks, including defaults, unsecured loans, lack of FDIC insurance, management fees, and the uncertainty of returns. The hosts express their concerns about the level of risk and the unclear nature of the promised returns.
🚫 Final Thoughts on P2P Lending as an Investment
In the conclusion, Ahmad and Christina express their reservations about P2P lending as an investment. They compare P2P returns to those of index funds and ETFs, which they find to be less risky and potentially more rewarding. They advise viewers to conduct their own research and consider their risk tolerance before investing in P2P platforms. The hosts reiterate the importance of understanding the investment fully and making informed decisions based on one's financial goals and lifestyle.
Mindmap
Keywords
💡Peer-to-Peer Lending
💡Shared Economy
💡Investment
💡Risk Profile
💡Interest Rate
💡Defaults
💡Diversification
💡Management Fees
💡Estimated Returns
💡Financial Independence
Highlights
Introduction to peer-to-peer lending in the shared economy
Explaining how peer-to-peer lending platforms work without bank involvement
Discussing the process of lending money on peer-to-peer platforms
How borrowers are evaluated based on risk profiles
The importance of understanding the taxes related to peer-to-peer lending
Listing the pros of peer-to-peer lending, including monthly payments and potential for higher returns
Highlighting the cons of peer-to-peer lending, such as defaults and lack of FDIC insurance
The impact of management fees on the returns of peer-to-peer lending investments
The difficulty in determining the actual return on peer-to-peer lending investments
Comparing the returns of peer-to-peer lending to other investment options like index funds and ETFs
The authors' perspective on why they do not consider peer-to-peer lending a good investment
The necessity of making significant assumptions for higher returns on peer-to-peer platforms
The risk of investing in aggressive loans with higher defaults for higher returns
The lack of collateral on peer-to-peer loans, leading to total loss in case of default
The authors' advice on doing one's own research before investing in peer-to-peer lending
Encouragement for viewers to subscribe and join the financial independence journey
Transcripts
hey guys ahmad and christina from our
rich journey
in today's video we are going to be
talking about peer-to-peer
lending in this shared economy that we
exist in there are so many different
ways
that people are making money they have
places where you can lend out your home
to people lend out land to people
now they even have places where you can
lend out money to other people
on these peer-to-peer lending platforms
you give money to people they pay you
back on this platform and plus
interest and so people have been
reaching out to us and really asking us
about more details about peer-to-peer
lending how it works
what are the estimated returns and
whether we think it is a good
investment and we love this topic and so
that's what we're going to talk about
in this video we're going to go into
detail about all things
peer-to-peer lending we're going to go
into detail about what it
is about how borrowers are evaluated
we're going to talk about the taxes
related to peer-to-peer lending
the pros and cons and then we're going
to talk about the estimated returns and
whether we think
peer-to-peer lending is a good
investment now before we get into this
whole entire topic we do want to say if
you are new to our channel
our channel is all about making money
saving money and
investing money on the road to financial
independence ahmad and i were pursuing
financial independence for eight years
we reached it we quit our federal
government jobs and we retired early
before the age of 40.
so if you are interested in learning
about ways to make
save and invest money make sure you
subscribe to our channel and
follow us on instagram so let's first
start off by talking about
what peer-to-peer lending is so under
the traditional sense of borrowing money
someone would go to a bank and ask for a
loan the bank would either apply
approve or deny it and give the money to
that person
but under peer-to-peer lending the bank
is not
involved they have platforms that are
available where a person that is looking
for money will go on this platform
request money from other individuals and
those
individuals would allow that person to
borrow money from them
on these platforms and in exchange they
get an
interest rate returned from the borrower
so let's focus on the investor side of
this p2p relationship
if someone is interested in opening a
p2p account
the first thing you have to do is find a
p2p
platform that you feel the most
comfortable with there are a ton
of them out there but typically once you
have identified the platform
the process is relatively
straightforward there's an application
that you complete and eventually you
deposit
money into these accounts once your
money is in these accounts
you go to the next level of being able
to
invest that money in people that are
looking to borrow money
for whatever reason so basically these
p2p platforms
hold your money into an account so that
once you begin
reviewing requests from borrowers and if
you ultimately decide
to loan money to these borrowers the p2p
platform takes money from your account
and sends it over to the borrower well
one of the nice things about this
is that the platforms also rank
borrowers
and they're ranked on their risk profile
so they look at things like credit
history credit score
debt to income ratio bankruptcies
collections even
job histories and then they rank these
borrowers from
very high risk to very low risk and
depending on the level of risk if
someone has
a higher risk of default for example you
will potentially get a higher
interest rate from loaning money to that
person if they have a lower risk of
default
the idea is that you're going to get a
lower interest rate from that person if
you loan money to them
but the overall idea is that the
peer-to-peer lending platform is
providing this information to you
in order for you to make the decision it
is up to you whether or not
you want to invest in someone that is
more risky or in exchange for a higher
rate of return
or if you want to be more conservative
and invest in someone that has a better
chance of paying your money back
by doing so you're going to take on a
lower interest rate but the idea is that
the risk of investing in that particular
borrower
is also lower so assuming that there's
no default or late payments
all of the interest that you receive is
made to you into this account
on a monthly basis and i mentioned this
because this is a great transition into
the pros and cons of p2p lending so
we're going to start off
with the pros and the first pro is those
monthly
payments like i said when you set up
your account when you lend money
you're supposed to be receiving interest
payments each
month now this is in contrast to
dividend payouts
or when you're collecting interest on
bonds which typically happen
on a quarterly or semi-annual basis so
with
p2p lending you get that monthly income
that's coming in
the next pro is the potential for higher
returns
a lot of the p2p platforms advertise
interest rate returns that are higher
than cds
bonds and money market accounts the last
pro
is diversification with many of the p2p
lending platforms
your funding can go towards a portion of
a person's loan
you don't have to fund an entire loan so
you can spread the risk amongst many
different loans
with your dollars so i'll give you an
example if you want to fund a
high risk loan but they're asking for a
thousand dollars you can fund for
example
maybe just 25 of it and then you can
fund
a lower risk person with 25 you can
spread your money across
multiple different loans with multiple
different risk profiles
so let's get into some of the cons one
big con
is defaults now one of the reasons why
peer-to-peer
borrowers go to these platforms is
because
they don't qualify for loans at banks
and so they're coming here with maybe
not
as good of history of credit and so the
risk of default is a lot higher
and when someone defaults on a
peer-to-peer loan you lose all of your
money
the next con is that the majority of
these loans on these peer-to-peer
lending platforms
are unsecured that means there is no
collateral
in the event of of default so you lose
all your money you're not getting
interest payments and you have nothing
else in exchange for that default there
is no collateral
the next con is that the money that you
deposit in a peer-to-peer lending
platform
is not fdic insured like it would be if
you deposit that money in a traditional
bank
and this is really big because these
peer-to-peer lending platforms
are really selling the idea that if you
invest with borrowers on these platforms
you're going to be making more
than a traditional bank account for
example but if you have your money in a
bank account like aman said
that money would be insured by the fdic
if something happens to your money
in these peer-to-peer platforms if the
platform shuts down or
if you get a default on the money that
you borrow none of that money at all is
insured
the next con is management fees and you
know we are not
fans of fees on our investments but when
you
invest in a peer-to-peer lending
platform you are also being charged
management fees for the money that you
were loaning out and
to us that sounds a little
counter-intuitive if you are an investor
in a loan
shouldn't the person that's getting the
loan be charged the fees
but as the person providing the loan in
most cases you are also being charged
defeat
by the platform and that cuts into your
returns
so our final con with investing in
peer-to-peer lending has to do
with your rate of return and this
actually segues perfectly into whether
or not
we think peer-to-peer lending is a good
investment
and our return is what we really focus
on when we're making investments
and if you look at peer-to-peer lending
platforms the return
is very unclear and i'll give you an
example by looking at two of these very
popular peer-to-peer lending platforms
the first one is prosper so if you look
at prosper
they rank their borrowers from a
high-risk profile to a low-risk profile
and they say their estimated returns for
investors
are 3.6 to 13.9 percent
for lending now if you look at the fine
print though
they say that these estimates require a
significant assumptions about the
repayment of loans
and it's this fine print that gives us a
little worry when it comes to investing
in peer-to-peer lending platforms
because in order to get
the highest return the 13.9
you have to do two things one you have
to make
significant assumptions number two
you have to invest in the most
aggressive loans
with the highest defaults these are two
things
that we feel uncomfortable doing just
for a 13.9 percent return
so here's another site called perform
it's another top peer-to-peer lending
platform
and with the estimated returns on this
site it doesn't even begin to
estimate those returns instead it says
that there are compelling
risk-adjusted returns for investors
so again when you're investing in these
peer-to-peer lending platforms it's
really hard to determine what the actual
return is
so you really have to understand that
going into these types of investments
so considering the pros and the cons the
question of this video
is whether or not p2p is a good
investment
and at least from our perspective in how
we like to invest our money
we do not think it is a good investment
i mean if you look at the prosper
example
in order to get the maximum return it
requires
the maximum amount of assumptions and
the maximum amount of risk
and it's only 13 we
know that there are many more other
investments out there that we can get 13
on we have gotten a lot higher percent
investing in
index funds and etfs and so for us
when we're looking at investing our
money in p2p
we can't help but look at these other
investments
and say why take on that p2p risk of
losing
all your money in some cases when we can
just
invest in an index fund or an etf that
even
outperforms the p2p lenders and for
people that are willing to take on
higher risk for higher returns there's
always that availability by investing in
the stock market
people choose to invest in individual
stocks for example
but at least with individual stocks you
can look behind the fundamentals and the
financials of the company
and really get an idea or an overall
sense of your potential return
by investing in a particular company
with p2p
you really don't have that sense you
don't have that ability to make those
projections
so this was our perspective on p2p
lending
we hope that we've answered the
questions that you have been asking us
about this particular investment and so
as we
always like to say you must do your own
research and make an investment
that fits your needs and your lifestyle
and so as usual if you like this video
please give it a thumbs up
subscribe to our channel and join the
journey
you
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