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.

Outlines

00:00

💼 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.

05:03

📈 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.

10:03

🚫 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.

Keywords

💡Peer-to-Peer Lending

Peer-to-Peer (P2P) lending refers to a financial transaction where individuals lend money directly to other individuals without the involvement of traditional financial institutions like banks. In the context of the video, P2P lending platforms facilitate these transactions, allowing investors to lend money to borrowers in exchange for interest payments. The video discusses how P2P lending operates, its risks, and potential returns, making it a central concept for understanding the video's theme.

💡Shared Economy

The shared economy is an economic model where resources are shared among individuals, often facilitated by digital platforms. In the video, the term is used to describe the broader context in which P2P lending operates, highlighting how people are making money by sharing not just physical assets like homes or land, but also financial resources through lending money to each other.

💡Investment

An investment in the video's context refers to the act of committing money with the expectation of earning a return or profit. The video discusses P2P lending as a form of investment, where individuals can potentially earn interest by lending money to others. It also compares P2P lending to other investment options, such as index funds and ETFs, to evaluate its attractiveness as an investment strategy.

💡Risk Profile

A risk profile in the video refers to the assessment of a borrower's creditworthiness based on factors like credit history, debt-to-income ratio, and job history. P2P platforms use these profiles to rank borrowers from high risk to low risk, which influences the interest rates investors can earn. The video explains that higher-risk borrowers may offer higher interest rates but also carry a greater chance of default.

💡Interest Rate

The interest rate in the context of the video is the percentage of the loan amount that borrowers pay to investors as a cost of borrowing. It is a key factor in P2P lending, as it determines the return on investment for the lender. The video discusses how interest rates vary based on the risk profile of the borrower, with higher-risk borrowers typically offering higher rates.

💡Defaults

Defaults refer to instances where borrowers fail to repay their loans as agreed. In the video, defaults are highlighted as a significant risk in P2P lending, as they can result in the loss of the entire investment for the lender. The video emphasizes the importance of understanding the risk of default when considering P2P lending as an investment.

💡Diversification

Diversification in the video refers to the strategy of spreading investments across various loans with different risk profiles to reduce the overall risk. P2P platforms allow investors to fund portions of multiple loans, which can help mitigate the impact of a single loan default. The video mentions diversification as one of the pros of P2P lending, suggesting it as a way to manage risk.

💡Management Fees

Management fees in the video are the charges that P2P platforms impose on investors for the service of facilitating the lending process. These fees can reduce the overall returns for investors, as mentioned in the video. The discussion around management fees highlights the costs associated with P2P lending and how they can impact the net returns for investors.

💡Estimated Returns

Estimated returns in the video refer to the projected earnings that investors can expect from their P2P lending investments. The video discusses how these estimates are often based on assumptions about loan repayments and can vary widely. It also compares the estimated returns of P2P lending platforms to other investment options, questioning whether the risks associated with P2P lending justify the potential returns.

💡Financial Independence

Financial independence in the video is mentioned as the goal of the channel's hosts, who have achieved it by making, saving, and investing money effectively. This concept is used to establish the credibility of the hosts and to frame the discussion around P2P lending as part of a broader strategy for achieving financial goals. The video suggests that P2P lending should be evaluated in the context of an individual's path to 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