Peer-to-peer lending has grown tremendously in the past decade and it’s going to be around for a long time coming. In fact, in the United States alone, the peer-to-peer lending industry will generate $1 trillion in new loan originations by 2022, that’s more than one trillion dollars!
We’re talking about an exponential growth rate of over 50% per year, which means that if you get started with peer-to-peer lending today, you could conceivably make hundreds of thousands of dollars per year within just 2 years.
What is P2P Lending?
Peer-to-peer lending, also known as P2P lending, is a growing industry where individuals lend money to other individuals through online loans. The goal of peer-to-peer lending is to lower borrowing costs for consumers and reduce the risk for lenders.
The way it works is an individual will lend money directly to someone else. Instead of borrowing from a bank or getting an individual loan, they can borrow from many lenders at once by posting their loan requests on a peer-to-peer site. Through sites like Prosper and Zopa, borrowers set up profiles that explain what type of loan they need, how much they want, and for how long.
Types of Peer-to-Peer Loans
P2P loans come in many forms and can be used for any number of purposes. Typically, peer-to-peer loans are unsecured personal loans where there is no collateral involved, making them accessible to people with a low credit score or a poor borrowing history.
There are two types of peer-to-peer lending: secured and unsecured loans. Secured P2P loans require some sort of collateral such as a house or car, while unsecured ones do not (although they usually require a decent credit score). Peer-to-peer investors who lend on their platforms can also choose which loan applicants they will accept or reject based on personal criteria.
Benefits of Peer-to-Peer Lending
While there is a lot of buzz surrounding peer-to-peer lending, it’s important not to be blinded by the hype and realize that P2P lending isn’t right for everyone. There are many benefits of peer-to-peer lending if you decide it’s right for you, including Making Money Online: Peer-to-peer (P2P) lending can be used as a way to supplement income from another job or activity.
Peer-to-peer is also an excellent source of passive income since you can lend money for fixed terms. For example, you may decide that in return for loans and interest, your time spent making personal loans will take up about 15 hours per week over a year.
Popular Peer-to-Peer Lending Platforms in The US
Among its 50 million members, Lending Club has issued more than $10 billion in loans. Prosper has funded almost $2 billion in personal loans to date. Although these platforms have provided more than 100,000 people with access to capital for things like home improvements and medical care (or credit card consolidation).
Each platform is essentially a middleman that connects borrowers and lenders through a mutually beneficial financial arrangement. The three largest peer-to-peer lending platforms combined—Lending Club, Prosper, and Funding Circle— account for more than 60 percent of all such loans issued nationwide (and roughly 85 percent of all peer-to-peer lending volume).
Although some platforms allow you to become a direct lender (on your platform profile), most users are there primarily as an investor.
Risks Associated With Peer-to-Peer Lending
The most obvious risk associated with peer-to-peer lending is simple: if you invest in a loan and your borrower does not pay, you have lost your principal investment. In addition, peer-to-peer lending sites such as Prosper and Lending Club are only available in certain states, adding another layer of risk.
Your investment could be restricted based on where you live and whether or not that state regulates P2P lending. While regulation seems like a good thing for both borrowers and lenders (it means loans will be paid back), that may end up being too much of a burden for online P2P lenders to manage effectively.
Final Thoughts on Peer-to-Peer Lending
Online earning opportunities are growing in popularity, as well as peer-to-peer lending. These options allow you to invest your money and earn more without leaving your home. If you aren’t comfortable with taking too much risk on P2P loans.
You can also put your money into bonds or CDs and enjoy a smaller rate of return. Investing takes time, research, and patience – but it’s worth it if you want a reliable stream of income.
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