What are the opportunities of investing in peer to peer lending for passive income?
Peer to peer lending is a powerful asset class and if used in the right way it can offer a good ROI and a stream of persistent passive income. Learn these 12 advantages of peer to peer to make better investment decisions.
1. Higher interest rates than a bank account: Generating passive income with the bank account interest rates timed deposits as of 2018 is difficult, because they are sub 2% in most countries. P2P (peer to peer) lending on average offer much higher interest rates; anywhere between 5% and 14%.
2. Compounding: A powerful factor in p2p lending is that the returns can be easily compounded. Most platforms allow for the interest to be invested again, this means that the investor foregoes the passive income in the present to have more in the future. This compound interest calculator will show you the power of compounding.
3. Diversification: With p2p lending, it is easy to diversify across many different loans because investors can buy small fractions of each loan. The diversification is important because it shields the investors from the risk of loan default in any individual loan. This asset class was not available in the past, so investors can now diversify also outside of the traditional passive income investments such as dividend ETFs and real estate investments. Peer to peer lending platforms come in two flavours; p2p markets and p2p platforms. P2p markets allow many p2p platforms to sell their loans on the platform. While p2p platforms source the loans themselves, they are single p2p providers. The p2p markets allow for more diversification than the single p2p platforms, and they some of them perform additional due diligence on the p2p platforms they on board. An example of a p2p marketplace is Mintos.
4. Easy to understand: Peer to peer lending is easier to understand than stocks. There are fewer variables in terms of returns and risk. Investing in p2p loans is a learning process and teaches investors new things about how to invest, risk and how to earn a passive income.
5. Guarantees against default: P2p loans are not covered by government insurance schemes. However, many platforms have default insurance funds and buyback guarantees. #DYOR
6. Deferred tax payments and rebates: In some countries, It is possible to invest in p2p loans from pension accounts, this allows the passive income generated to be taxed when it is taken out of the pension account rather than when it is earned. This creates a more powerful compounding effect. Details vary from system to system.
7. Deferred Tax: In some countries, it is possible to invest in p2p lending via a limited liability company. The advantage here is that the passive income is taxed differently. Depending on your situation, it could be that different tax rates apply when a company receives an income vs when an individual receives an income. Check with a local accountant.
8. Regulation: p2p lending is no longer a new asset class, and regulators are now actively following this industry and regulating it. This should protect the investor better.
9. Deflation: In the case of deflation, that is the price of money goes up when compared to goods, the lenders will get more value from the repayments than their initial loan. This happens because the purchasing power of capital has gone up between the period the loan started and the interest and capital payments. This event is very rare because central banks are wired to fight deflation.
10. Higher priority in case of default: Lenders get paid before equity holders, which decreases the risk for p2p lenders
11. Liquidity: Many p2p platforms allow lenders to liquidate their loans for a fee via a secondary market.
12. Passive Income: P2p investments are passive in nature. Most of the time is spent on researching the best p2p market or p2p platform and understanding how these work. Learning how to invest in p2p will reduce the risks of costly mistakes. Once set up though, a system of auto investing can invest any idle cash in the account automatically. A direct periodical deposit can also be created to invest in the p2p platform periodically. P2p is one of the most passive of the passive income investment available!
These opportunities of p2p loans can be leveraged to counter the risks of p2p lending. In the comments below do let us know what are your thoughts on the advantages and how you turn them these into growth opportunities for your capital.